Interest rates on bank loans have been steadily declining over the past few months with banks, flush with loanable funds, not getting sufficient demands for credit.

Despite a gradual improvement in credit disbursement, the base rate—the minimum interest rate used to determine loan pricing—has continued to drop. According to the Nepal Bankers’ Association, commercial banks disbursed Rs 4,850bn in loans over the first eight months of the current fiscal year (mid-July to mid-March), marking a 6.12 percent increase. As of mid-July last year, total outstanding loans stood at Rs 4,570bn. Nepal introduced the base rate system in the fiscal year 2012-13 to enhance transparency in interest rate determination. It includes clearly identifiable cost components, ensuring competitive and fair loan pricing.

The average base rate of commercial banks for the month of Chaitra (mid-March to mid-April) has dropped to 6.48 percent from 6.62 percent in the previous month (mid-February to mid-March). Four banks now have base rates below six percent, with Standard Chartered Bank offering the lowest at 5.03 percent. Rastriya Banijya Bank follows at 5.28 percent, while Everest Bank and Nepal Bank stand at 5.46 percent and 5.96 percent, respectively. NIC Asia has the highest base rate at 7.41 percent, while the base rates of 14 Class ‘A’ banks remain below seven percent. Prime Commercial Bank Ltd is the only other institution with a rate above seven percent.

All commercial banks reduced their base rates for Chaitra (March 14-April 13). Machhapuchhre Bank saw the sharpest cut (0.22 percent), lowering its rate from 6.9 percent to 6.68 percent, while Citizens Bank International made the smallest adjustment (0.06 percent), reducing its rate from 7.01 percent to 6.95 percent.

The decline in base rates is driven by surplus liquidity in the banking system, which has also led to a rapid reduction in deposit interest rates. Since loan interest rates are calculated by adding a premium to the base rate, the drop has made borrowing cheaper.

Despite lower interest rates, loan demand remains weak, leaving banks with over Rs 600bn in surplus investable funds. To attract borrowers, many are offering loans with minimal premium charges. Meanwhile, deposits grew by 4.9 percent to Rs 6,037bn in eight months—up from Rs 5,754bn in mid-July last year.