January 19: The interest rates of loans issued by banks and financial institutions (BFIs) have started to drop after the BFIs reduced the interest rate of deposits.

According to Nepal Rastra Bank, the base rate and the interest rate of loans have been continuously declining along with the interest rate of deposits in the current iscal year (FY) 2080/81.

The central bank has said that the average interest rate of deposits of commercial banks was 8 percent in mid-July of the current year, but it fell to 7.62 percent in mid-December. Similarly, when the average base rate fell from 10.11 percent to 9.64 percent, the interest on loans also fell from 12.24 percent to 11.85 percent.

Deputy spokesperson of Nepal Rastra Bank Dr Dilliram Pokharel said, "Nepal Rastra Bank itself has encouraged the reduction of interest rates by reducing policy rates," he said, "It seems that banks are also reducing interest rates as liquidity has eased."

Stating that there is excess liquidity in the market at present and the NRB is mopping liquidity, Pokharel said that the interest rates will drop further.

After liquidity eased in the financial system, the Nepal Bankers' Association decided to end the gentlemen’s agreement to fix uniform interest rates and decided to allow banks to fix the interest rates as per their wish.

As a result, the maximum interest rate of deposits of commercial banks fell below 8 percent in mid-January. In mid-January, 18 banks announced reduction in interest rates.

According to the instructions of the central bank, BFIs can set the base rate by adding 0.75 percent profit to the cost. Banks have to calculate the base rate on a monthly basis and submit it to the central bank within 7 days of the end of each month and publish it on their website.

Banks have been determining the interest rate on loans by adding a certain percentage premium to the base rate of the last three months. According to this arrangement, when the average base rate of the bank decreases every quarter, the interest rate of the loan automatically decreases.

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