The interest rates of commercial banks have reached their lowest point in nine years. With a decline in loan flow, the interest rates have nearly returned to the levels seen a decade ago. In the fiscal year 2073 BS, the base rate of commercial banks was at a minimum of 6.10 percent. For nine years since then, the base rate had not fallen below that level.
By the end of the month of Magh, the base rate of banks had reached 6.65 percent, marking the lowest point in nine years. Following the 2072 BS earthquake and the blockade imposed by India, the economy slowed down, leading to an unexpected drop in loan demand from banks. The market's purchasing power decreased, and the blockade halted the import of raw materials, causing industries to shut down. This situation impacted loan flow, leading to a surplus of deposits in banks.
The effects of this were seen in the fiscal year 2073 BS, when the base rate dropped to 6.10 percent. After the earthquake and blockade, the global COVID-19 pandemic further strained the economy, which has now spent nearly a decade in recovery. However, even after a decade, the economy has not been able to regain momentum, pushing commercial banks back to the state they were in a decade ago.
As of the month of Falgun, the base rate of commercial banks stands at 6.65 percent, while the credit-deposit ratio (CD ratio) is at 79.57 percent. Currently, commercial banks have liquidity amounting to NPR 1.171 trillion. Despite collecting deposits worth NPR 5.998 trillion, commercial banks have only invested NPR 4.827 trillion in loans. Although banks are allowed to invest up to 90 percent of deposits in loans, they have only managed to invest 79 percent so far.
Since the current fiscal year, loan expansion has weakened, causing the base rate to return to levels seen a decade ago. After the COVID-19 pandemic began, a nationwide lockdown was imposed, and the base rate reached 6.66 percent but did not fall below that level. However, in the current fiscal year, the base rate has dropped below the levels seen during the COVID-19 period.
According to the Nepal Rastra Bank, in the fiscal year 2073/74 BS, when the base rate reached 6.10 percent, the loan interest rate dropped to 8.86 percent. The earthquake in 2072 BS and the Indian blockade slowed down the economy, and by the following year, 2073 BS, the impact was visible in the banks' balance sheets. Despite the low interest rates that year, banks were unable to increase loan flow, leading to the base rate dropping to 6.10 percent. After that, it began to rise again.
In the fiscal year 2074/75 BS, the minimum base rate of commercial banks rose to 9.67 percent, with loan interest rates reaching 11.10 percent and deposit interest rates at 6.10 percent. In 2075/76 BS, the base rate remained at a minimum of 9.48 percent, with loan interest rates at 12.20 percent and deposit interest rates at 6.30 percent. In 2076/77 BS, the base rate was at a minimum of 8.50 percent, with loan interest rates at 10.11 percent and deposit interest rates at 6.10 percent.
In 2077/78 BS, the base rate dropped to 6.66 percent, with loan interest rates at 8.43 percent and deposit interest rates at 4.62 percent. In 2078/79 BS, the base rate reached a minimum of 6.71 percent. According to the Nepal Rastra Bank, the COVID-19 pandemic slowed down loan flow and led to a surplus of deposits, forcing banks to lower the base rate. Although the base rate returned to around 6 percent that year, it had not been near that level in the previous eight years.
Despite three consecutive years of rising interest rates, the base rate dropped in 2077 BS. That year, the base rate reached 6.66 percent, but it has now fallen further to 6.65 percent. The base rate, which dropped in 2077 BS, rose to 9.54 percent by the end of 2078/79 BS due to liquidity management.
Manoj Gyawali, Deputy CEO of Nabil Bank, attributes the current low interest rates to the high liquidity in the market. He explains that the earthquake and the subsequent Indian blockade reduced loan flow, increasing banks' liquid assets and impacting the base rate. Even after nine years, the high liquidity in the market has pushed banks to maintain the base rate around 6 percent.
"When liquidity decreases, interest rates rise, and when it increases, interest rates fall. That is what is happening now," Gyawali said.
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