December 12: Banks have started reducing interest rates on deposits after Nepal Rastra Bank reduced policy rates through the first quarter review of monetary policy.

Generally, banks change the interest rate at the end of a month, but they implemented the new interest rate in the middle of the month after the change in the policy rate.

According to the instructions of the central bank, commercial banks can change the interest rates with immediate effect if there is a change in the bank rate and policy rate provided that the banks publish the notice about the change in interest rates.

As per the existing laws, banks should publish the interest rate applicable on deposits for each month before the beginning of the month. According to this provision, banks have been publishing notices on the last day of every month that give information about the interest rate applicable for the next month.

With the review of the monetary policy on Friday, the central bank reduced the bank rate from 7.5 percent to 7 percent and the policy rate from 6.5 percent to 5.5 percent. Following the central bank’s move, the banks also started reducing the interest rates with immediate effect by publishing notices.

So far NIC Asia Bank, Kumari Bank and NMB Bank have published notices and reduced the interest rates. NIC Asia Bank published a notice on Sunday and fixed the maximum interest rate on fixed deposits at 8.67 percent.

However, NIC Asia Bank said that the new interest rate of the bank will be applicable only from mid-December.

Kumari Bank has reduced the interest rate with effect from Sunday. Kumari has set a maximum interest rate of 9.61 percent on individual term deposits, down from 10.10 percent in the past two months.

Similarly, NMB Bank has also implemented the new interest rate from Monday. NMB Bank had been giving a maximum interest rate of 9.50 percent on individual term deposits, but has reduced it to 9 percent from Monday.

In recent times, banks have excess liquidity due to the lack of credit flow compared to the increase in deposit collection. As the liquidity situation eased, the central bank reduced the policy rates making it easier for the banks to reduce the interest rates.

According to the data of the NRB, banks currently have the capacity to extend loans of more than Rs 600 billion. However, due to non-expansion of credit flow, the interbank interest rate has fallen to one percent.

As there has been excess liquidity in the banking system, the central bank has been mopping excess liquidity from the market through deposit collection tools. Since November 23, the central bank has withdrawn about Rs 150 billion from the market through deposit collection tools. Of that amount, Rs 45 billion have matured and have been returned to the market.

NRB records show that commercial banks have a total deposits of Rs 5289 billion while they provided loans of Rs 4407 billion.