November 17: The interest rates of commercial banks have fallen to a single digit five months after the banks started determining the interest rates independently. Banks have started reducing interest rates as there is no demand for loans while deposit collection has increased.

As per the gentlemen’s agreement reached between commercial banks earlier, the Nepal Bankers Association had fixed a uniform interest rate on personal term deposits at 9.99 percent for a one-month period from mid-April to mid-May. The banks applied the same interest rates for the next two months but the consensus ended in mid-July and the banks decided to fix the interest rates independently. Thereafter, the interest rates had started to increase.

However, most of the banks have reduced the interest rate to a single digit for the Nepali month of Mangsir (mid-November to mid-December). More than a dozen banks have reduced their interest rates for the period of mid-November to mid-December compared to a month ago. Starting from November 17, a total of 14 commercial banks have fixed the maximum interest rate of personal term deposits at less than 10 percent.

In the review month, 13 banks reduced the interest rates while one increased. Six banks have kept the interest rates unchanged.

Nepal SBI Bank, Himalayan Bank and Machhapuchchre Bank have set the highest interest rates for personal term deposits in the review month. These three banks have fixed the interest rates at 10.603 percent per annum on personal term deposits. The lowest interest rate has been fixed by NIC Asia Bank, which has set an annual interest rate of 8.968 percent on individual term deposits.

NIC Asia reduced the interest rate by 2.035 percentage points. Similarly, NMB Bank, which increased the interest rate last month, reduced it by 1.243 percentage points. Compared to the previous month (mid-October to mid-November), only Machhapuchhre Bank increased the interest rate. The banks have also reduced the interest rate on general savings accounts. The commercial banks have reduced the maximum interest rate on general savings to 7.60 percent from 8 percent.

According to the instructions of the Nepal Rastra Bank regarding interest rate determination, banks are allowed to increase or decrease the interest rates by 10 percent every month. Similarly, there is a provision that banks should publish the interest rate applicable for every month a day before the start of the new month.

Banks are required to pay 1 percentage point more for deposits through remittance and 2 percentage points less for institutional depositors than for individual deposits.

Deposits in banks are increasing with the recent increase in remittance income. However, due to lack of improvement in economic activities, demand for credit is low. As of mid-November of the current fiscal year, deposits in banks and financial institutions have increased by 2.8 percent and credit flow by 2.3 percent. During the same period of the last fiscal year, deposits increased by 0.4 percent and lending increased by 1.3 percent. However, compared to the previous months, the demand for loans has started to increase, according to the report of the central bank.

According to the NRB, the interest rates on deposits and loans have started to decrease along with the base rate of banks.

As the deposit collection is higher than credit flow, the credit-deposit ratio (CD ratio) of banks has also decreased. On November 7, the average CD ratio of banks remained at 81.31 percent. According to the central bank, banks can extend credit flow by maintaining a CD ratio of up to 90 percent. So, the banks have the capacity to provide additional loans of about Rs 600 billion.