Commercial banks have decided to reduce the interest rate on fixed deposits to single digits. A meeting of the Nepal Bankers' Association (NBA) on Wednesday decided to lower the deposit interest rate effective from April 14, the Nepali new year 2080 BS. Over the past year, interest rates have been a subject of much debate and controversy with the business community, in particular, blaming high borrowing as one of the main reasons for the current economic slowdown in the country. In March, NBA fixed the interest rate on fixed deposits for individual depositors at 11 percent. Under huge pressure from the private sector, the association of bank CEOs has decided to reduce it to 9.99 percent for individual depositors effective from the new year. Similarly, the interest rate for institutional deposits will come down to 7.99 percent from the current 9 percent. The NBA has decided to reduce the interest rate of institutional and individual term deposits by 1.01 percentage points.

Similarly, interest rates on savings account deposits have been set at a minimum of 5.40 percent to a maximum of 7.40 percent. Currently, the interest rate for savings account deposits ranges from a minimum of 6 percent to a maximum of 8 percent. Likewise, the interest rate on call deposits has been lowered to 2.7 percent from 3 percent at present.

With this decision of the bankers, the interest rates on deposits will come to single digits after 11 months. The deposit interest rate was 9.96 percent in May last year which increased to 10.12 percent in June. The interest rate on deposits kept on increasing until January this year. Since January, banks have been lowering deposit interest rates for each month except for March. Considering the severe shortage of investment-grade liquidity in the financial system seen since last year, interest rates on both deposits and lending kept on rising. With the liquidity situation easing in the past 5-6 months, banks are in a better position in terms of liquidity management. The high interest rate has increased the cost of funds for banks. In addition, the demand for loans declined sharply as economic activities slowed dramatically. Currently, banks have around Rs 200 billion of investible funds. Lending rate also to decrease The lending rate is also expected to come down after NBA slashed interest rates on deposits. The cost of funds banks is high due to the interest rate of deposits. In that case, if the cost comes down, the base rate will also be reduced, and thus, the lending rate will decrease automatically. However, it may take some time before the lending rate comes down. Bankers say the lending rate will be set according to the previously reduced deposit interest rate for now. Banks have been calculating the base rate on a quarterly basis. and the last quarter of the current fiscal year starts from Baisakh. This way, the effect of the interest rate cut in Baisakh will be seen in Shrawan (July-August). The banks will also have to reduce the spread rate to 4 percent by the end of Ashad (mid-July) which is currently 4.4 percent. The Nepal Rastra Bank has instructed the banks to lower the spread rate to 4.2 percent by the end of Chaitra (mid-April) and 4 percent by the end of Ashad. As a result, bankers say that the lending rate will decrease. The private sector has been demanding to slash the interest rate. In response, the government has said that the demand of the business community will be met. Speaking at the 57th General Assembly of the Federation of Nepalese Chambers of Commerce and Industry on Tuesday, Prime Minister Pushpa Kamal Dahal and Finance Minister Dr. Prakash Saran Mahat also assured to reduce the interest rate. However, on the same day, NRB Governor Maha Prasad Adhikari said in a press meet that the interest rate will be determined by the market and not by the central bank.