August 17: Commercial banks have started increasing the interest rates after the bankers decided to fix such rates on the basis of competition from mid-July.

Banks have increased the interest rate from the Nepali month of Bhadra (mid-August to mid-September) after the bank deposits started to decrease.

The government and other stakeholders had held a discussion at with the representatives of banks and financial institutions (BFIs) at the Ministry of Finance on Sunday to reduce the interest rates and increase investment. Finance Minister Dr Prakash Sharan Mahat, during the discussion with the bankers, had indicated that the amount in the accumulated funds of the local level will be counted as deposits. The government is yet to make a formal decision to provide this facility. A banker said that the interest rate will be affected if the government provides such a facility.

"Finance Minister said in the discussion with us that he will provide the facility to calculate local level funds as deposits," said the banker, "If that decision is implemented, liquidity may increase and interest rates may decrease."

During the discussion, the finance minister had requested banks to increase credit flow stating that the remittance inflow have been increasing and liquidity situation has eased. He said that the economic activities will not increase unless the banks increase investment.

In response, the bankers asked for the facility of counting local level funds as deposits to increase investment. With the lack of liquidity in banks and financial institutions, the government had given the facility to deposit up to 80 percent of the accumulated amount of the local level last year. After this facility ended in June, the deposits of the banks decreased by Rs 100 billion.

Since mid-July, the banks have been determining the interest rates by themselves following the ease in liquidity situation in the banking system. The Nepal Bankers' Association decided after one and a half years that the banks would be allowed to set their own interest rates.

In mid-July, when five banks increased the interest rate on deposit, 11 banks reduced it. Meanwhile, six of them kept it stable. Some banks decided to increase interest from mid-August saying that banks with high interest have started attracting depositors.

According to the instructions of the Nepal Rastra Bank regarding interest rate determination, banks are allowed to increase or decrease the interest rate by 10 percent compared to the previous interest rate every month.

There is a provision that banks should publish the interest rate applicable from the starting of a new month on the last day of the previous month.

As of Monday, banks and financial institutions have collected deposits of Rs 5597 billion and extended loans of Rs 4855 billion. Compared to the previous day, bank deposits decreased by Rs 4 billion on Monday, while credit flow increased by Rs 4 billion.

The average credit-deposit ratio (CD ratio) of banks, which was 81 percent at the end of the last fiscal year, has now increased to 83.69 percent.

There is a provision that banks can give loans by maintaining the CD ration up to 90 percent.