Fixed deposits decline as interest rates come down

With interest rates on savings coming down with every passing month, the proportion of fixed deposits in total deposits parked in banks and financial institutions (BFIs) is also declining.

This shows banks, awash with liquidity, are not making any efforts to attract fixed deposits where they need to provide higher interest rates.

Data released by the Nepal Rastra Bank (NRB) shows, BFIs had deposits totaling Rs 6,445bn in mid-August, of which fixed deposits accounted for 57.5 percent. This proportion was 61.3 percent in mid-Aug 2023.

With fixed deposits declining, the proportion of other saving products have increased. According to the NRB, regular savings products accounted for 26.7 percent of total deposits in mid-Aug 2023, which has increased to 30.3 percent in mid-August, 2024.

Bankers say the proportion of fixed deposits to total savings is declinding as BFIs earlier prioritized fixed deposits to increase their deposit base due to liquidity shortage in the banking system. With interest rates on deposits declining since the last fiscal year, the share of fixed deposits has also started to decrease. 

The banking system is in a liquidity surplus situation at present. The central bank has already absorbed nearly Rs 250bn from the banking system through different instruments since mid-July, with a plan to absorb another Rs 50bn underway. 

Central banks around the world injects money into the banking system when there is a liquidity shortage and absorbs from the system when there is excess liquidity. Bankers say banks are sitting on investable funds of approximately Rs 75bn.

As the liquidity situation improved, the Nepal Bankers’ Association—the association of commercial banks—ended the gentlemen’s agreement among Class ‘A’ banks in mid-July last year, allowing them to set interest rates on their own. The average interest rate on deposits fell to 5.66 percent in the first month of the current fiscal year 2024/25 (mid-Julty to mid-August) compared to eight percent in the same month of the previous fiscal year.

The proportion of fixed deposits rises when there is a shortfall of liquidity as banks compete with themselves to attract deposits by offering high interest rates. Since this is not the case now, banks, which are awash with loanable funds due to slow credit demand in the market, are not offering high interest rates on deposits.

According to the central bank’s directives, banks can offer a maximum of five percentage points higher interest on fixed deposits compared to the minimum interest rate on regular savings accounts. The difference between the maximum and minimum interest rates on all types of domestic currency deposit accounts, except for call deposits, should not exceed five percentage points.