Newbiz Report
KATHMANDU, August 8

Interest rates on loans are expected to decline further due to a reduction in the cost of capital for commercial banks. According to the unaudited financial statements published by banks, the average base rate of commercial banks fell to 8.09 percent in mid-June to mid-July 2024, down from 10.12 percent in the corresponding period a year ago.

Banks and financial institutions calculate the base rate by adding a 0.75 percent return to their cost, following the procedure set by Nepal Rastra Bank (NRB). The interest rate on loan is then determined by adding a certain percentage premium to this base rate. There is a provision to consider the base rate of the last three months when issuing loans. As a result, if a bank's average base rate decreases each quarter, interest rates on loan will automatically follow suit, and vice versa.

Due to a lack of liquidity in the previous fiscal year, banks consistently raised interest rates on deposits, peaking at 12.33 percent in December/January 2022. However, since mid-April 2023, commercial banks have fixed interest rates on deposits at a single digit. From mid-July 2023 onwards, banks have been setting these rates independently, unlike a gentlemen’s agreement in the past to fix a uniform interest rate by the members of the Nepal Bankers Association.

As a result, interest rates have been gradually decreasing. Former banker Parshuram Kunwar Chhetri notes that the base rate dropped when interest rates were lower during the last fiscal year. However, he also mentioned that the base rate remains relatively high due to banks securing long-term deposits at elevated interest rates during the liquidity crisis in the previous year.

In mid-July to mid-August 2024, Standard Chartered Bank had the lowest base rate among commercial banks at 8.60 percent, while NIC Asia Bank had the highest at 9.19 percent. Exactly a year ago, several banks had double-digit base rates, but by mid-July 2024, all had managed to reduce them to single digits.

Currently, commercial banks set interest rates on loan by adding a maximum 5 percent premium to the base rate. NRB regulations stipulate that this fixed premium cannot be altered once a loan agreement is signed with a customer.