August 13: The cost of capital of commercial banks has decreased, resulting in lower interest rates for loans.

As the liquidity situation eased, the commercial banks reduced the interest on deposits and the spread rate (the difference between the average interest rate given by banks on deposits and the average interest rate taken on loans) was adjusted according to the instructions of Nepal Rastra Bank.

According to the financial statements published by the banks, the average base rate of commercial banks has remained at 10.12 percent as of mid-July this year. During the corresponding period of the previous fiscal year, the average base rate of banks was 9.32 percent which increased to mid-January earlier this year. The base rate started to decrease from January onwards.

The interest rates, which the banks had earlier increased due to lack of liquidity, have been reduced since February.

In December last year, the interest rate on deposits of commercial banks had reached as high as 12.33 percent. However, the commercial banks have fixed the interest on deposits at a single digit (9.99 percent) since May. The bankers’ umbrella body in July decided that the interest rates will be determined individually by the banks.

As per the instructions of the central bank, the commercial banks have reduced the spread rate to 4 percent from mid-June. Banks have also reduced the interest rate to maintain the spread rate. As of mid-July, 12 out of 20 banks had their spread rates below 4 percent. The spread rate of 8 banks is more than 4 percent. The banks involved in merger and acquisition have been given exemption of up to one percentage point for maintaining their spread rate.

 At present, commercial banks add a maximum of 5 percent premium to the base rate while determining the interest rate on loans. The premium specified in the loan agreement cannot be changed later.