NBA's decision to slash interest rates came after improvements in deposits in Poush, and the credit-to-deposit (CD) ratio of commercial banks coming down to 86 percent. However, the interest rates on loans will be reduced only from mid-February or mid-March.
NBA sources said the bankers decided to reduce interest rates following a request from Finance Minister Bishnu Poudel and Nepal Rastra Bank Governor Maha Prasad Adhikari. The private sector has been protesting against the higher interest rates, arguing that it has made doing business costly for them. After the formation of the new government, the private sector held a series of meetings with the Prime Minister, Finance Minister and NRB Governor where they demanded two things - reduction in interest rates and postponement of guidelines on working capital loans. According to NBA, the base rate will also be revised with the change in the rate of deposits. As the interest rates on deposits and lending are correlated, it will certainly affect the interest rates on loans. As per the NRB data, the banks and financial institutions (BFIs) as of Monday collected deposits worth Rs 5311 billion, an addition of Rs 16 billion in the past five days. Similarly, the total extension of loans stands at Rs 4,778 billion. With the improvement in liquidity position, the CD ratio of banks has come down to an average of 86.65 percent while the interbank rate has also fallen to 6.14 percent from around 8 percent. The central bank had tightened the money supply citing that excessive loans were used to import goods which led the country to a deepening trade deficit and fast depletion of foreign exchange reserves. As a result, the base interest rate increased from around seven percent to up to 11 percent in the past year. Since mid-September, banks have increased their interest rates on fixed deposits by 10 percent to 12.13 percent, while the interest rate on savings accounts is 7.13 percent per annum on average. It has triggered the lending rate to go up to 18 percent a year.
