The interest rate (weighted average interest rate) paid by the general public when taking loans from banks and financial institutions has now fallen to an average of 6.90 percent. This is the lowest ever. This interest rate had reached a maximum of 13.03 percent in the fiscal year 2079/80, which has been continuously decreasing in recent years. According to the latest data of the Nepal Rastra Bank (Falgun), the average interest rate on loans is the lowest ever at 6.90 percent. Officials of the Nepal Rastra Bank and experts in the financial sector also claim that the interest rate on loans is at an all-time low. 

The interest rates on loans of various titles in banks are different. The average interest rate of all of them is 6.90 percent. But it does not mean that borrowers get the same rate when taking a loan from a bank. Different interest rates have to be paid according to the title, depending on the bank or even within the same bank. 

Based on the data available so far, the weighted average interest rate on loans is currently at its lowest point in history, said Suman Neupane, joint spokesperson of the Nepal Rastra Bank. He said that even though the average interest rate on deposits may be lower than now, the weighted average interest rate on loans as of last Falgun has fallen to its lowest point. 

‘Looking at the interest rate trend and structure of the past two decades, it seems that there are some years of low interest rates and some years of high interest rates. For some time in the fiscal year 2060/61, the deposit interest rate was 3 to 4 percent. But the loan interest rate was 10 to 11 percent. There were low interest rates even before and after the earthquake,’ he said, ‘Currently, both the deposit interest rate and the loan interest rate are very low.’

When the loan interest rate is low, the depositor’s income decreases and there is a possibility that investment will go to unproductive sectors. When the loan interest rate decreases, the deposit interest rate also automatically decreases. Although this is good for the borrower, there is a risk of capital flight. Even though the inflation rate is low now, the real interest rate is positive. Experts say that there is a risk of capital flight when loans do not grow as expected and the deposit interest rate also remains low. ‘Even when the interest rate in India is slightly higher than in Nepal, capital escapes through traders in the border area. Now the interest rate is even lower in Nepal. That is why capital flight is not a new thing,’ said an economist. 

The National Bank has started calculating the average interest rate on deposits and loans since 2069 (2012). According to a Rastra Bank official, there were no such low interest rates before 2069. In Asad 2069, the weighted average interest rate on loans was 12.40 percent. In Asad 2077/78, the average interest rate on loans in banks and financial institutions was 8.43 percent. Since then, the interest rate on loans has been rising. In Falgun 2079/80, the average interest rate on loans had reached 13.03 percent. Since then, the interest rate has started to decrease again. The interest rate that started decreasing from that point was 9.93 percent in Asad 2081. Last Asad, the average interest rate on loans has decreased to 7.85 percent.

‘The NRB has been calculating the average interest rate since 2012, since then the average interest rate on loans has been at its lowest point in last Ashar,’ said another senior official of the NRB. ‘Since interest rates were even more expensive before 2012, the average interest rate of last Ashar can be said to be the lowest so far.’ Although the NRB was established in 2013, the credit policy was started through monetary policy only in 2023.

Accordingly, from 2023 to 2046, the NRB itself used to set the interest rates on loans and deposits. Banks and financial institutions used to collect deposits and provide loans based on the same interest rate. However, after 2046, the NRB has stopped setting interest rates directly. The responsibility of setting interest rates in a sectoral manner has been left to the banks. However, although not directly, it has not stopped controlling the interest rates on deposits and loans through tools such as spread, base rate, interest rate on ordinary and fixed deposits. 

Nepal Rastra Bank has implemented an interest rate corridor in its monetary policy framework and has tried to control interest rate fluctuations through liquidity management, using the policy rate as the main tool, Neupane said. He said that in the current situation of excess liquidity, the interest rate corridor has prevented the deposit interest rate from falling further. 

Economy in a liquidity trap
Experts consider the current situation of banks and financial institutions having excess liquidity for a long time, interest rates being at a low point, and the inability to increase credit flow even by further reducing interest rates to be a 'liquidity trap'. 'A liquidity trap is when banks have excess liquidity for a long time, interest rates are very low, there is no possibility of further reducing interest rates, or there is no way to accelerate the economy by reducing interest rates,' said economist Nar Bahadur Thapa. 'Monetary policy does not work when a country is trapped in a serious liquidity trap. Fiscal policy must be active to keep the economy moving here.' 

Thapa said that monetary policy tools will be less effective after the country is caught in a serious liquidity trap. ‘To make the economy dynamic, the limit on real estate purchases has been increased, the risk burden of share loans has been reduced, the limit on personal share loans has been increased, working capital loan guidance and blacklisting have been relaxed,’ Thapa said, ‘But the current problem cannot be solved with these arrangements to increase production. Now, we need to find ways to improve the economy through fiscal policy as a whole.’

Economist and former Vice Chairman of the National Planning Commission Prakash Kumar Shrestha also admits that the economy is in a liquidity trap. He said that fiscal policy (budget) should be active to improve this situation and the private sector should be encouraged to expand investment. 

The overall demand in the market has decreased now. Since the demand for credit will increase after reforms in this situation, the consumption trend of citizens should increase to increase market demand. In the current situation, private investment has not been able to increase. Therefore, experts argue that the only way to solve the problem of the economy is to increase government spending.

Due to the excess liquidity in the financial system, banks and financial institutions have reduced deposit interest rates in Baisakh as well. Compared to Chaitra, the average deposit interest rate of commercial banks has decreased by 0.096 percentage points in Baisakh. Accordingly, the interest rate on one-year individual term deposits, which was 4.496 percent in Chaitra, has decreased to 4.400 percent in Baisakh. The interest rate on ordinary deposits has decreased only by a small percentage. Accordingly, the maximum interest rate on ordinary deposits, which was 3.192 percent in Chaitra, has decreased to 3.181 percent in Baisakh. 

As credit flow has not increased as expected while deposits are increasing, loanable amount (excess liquidity) has accumulated in banks and financial institutions. This is the reason why banks and financial institutions are reducing deposit interest rates every month. Banks have stated that since the base rate of banks and financial institutions has decreased after the deposit interest rate has decreased, the loan interest rate has also automatically decreased.

The minimum interest rate for one-year personal deposits is lower than the maximum interest rate set by banks for ordinary deposits in Baisakh. Accordingly, the maximum interest rate that banks will offer on ordinary deposits in Baisakh is 3.181 percent. While the minimum interest rate for one-year personal fixed deposits is 2.869 percent. 

In the last eight months (from Shrawan to Falgun), an additional Rs 482.1 billion has been added to deposits in banks and financial institutions. In the same period last year, deposits were added by Rs 277.23 billion. In the eight months of the current fiscal year (from Shrawan to Falgun), banks and financial institutions have extended additional loans of Rs 243.54 billion. This is an increase of 4.4 percent compared to last Ashar. With this, it has reached Rs 5741.24 billion.

The National Bank has set a target of 12 percent credit expansion in the current fiscal year. For this, about Rs 5.5 trillion more credit needs to be extended. Experts say that the annual target is unlikely to be met if we look at the situation for eight months. The recent developments in the country have not created an investment environment, which has led to the lack of demand for credit in the financial sector. As of mid-Chait, banks and financial institutions have accumulated a loanable amount of 1.22 trillion (excess liquidity). To address this problem, the Nepal Rastra Bank has expanded the scope of priority sectors through the semi-annual review of monetary policy in the first week of Chait. In addition to agriculture, energy, small and medium enterprises, tourism, information technology and export-oriented industries based on domestic raw materials have also been added. However, its impact is yet to be seen. 

Through the first quarterly review of monetary policy issued on 15 Mangshar, the Nepal Rastra Bank had reduced the standing liquidity facility rate, which is the upper limit of the interest rate corridor, from 6 percent to 5.75 percent and the policy rate from 4.50 to 4.25 percent. The National Bank has been saying that the permanent liquidity facility rate (upper limit) and the policy rate have been reduced with the aim of gradually reducing the distance between the lower and upper limits of the interest rate corridor and keeping the policy rate in the middle of the corridor (symmetric). The National Bank says that such a system will reduce the interest rate that banks have to pay when borrowing from banks and financial institutions, which will reduce their costs. 

Fixed deposits decreased 
The direct impact of the significant reduction in the interest rate on deposits has been on fixed deposits. As interest rates continue to fall, the interest rate on fixed deposits is only slightly different from that on ordinary savings, and the enthusiasm of citizens to keep money in fixed deposits has decreased. This is confirmed by the decrease in the share of fixed deposits in total deposits and the increase in ordinary savings in the same period of the current fiscal year compared to Falgun of the last fiscal year. 

According to Nepal Rastra Bank, as of last Falgun, the share of current accounts in the total deposits of banks and financial institutions was 6.6 percent, savings accounts 44.1 percent, and time deposits 40.1 percent. While in the same period last year, the share of current accounts in the total deposits was 5.4 percent, savings accounts 35.4 percent, and time deposits 51.7 percent. This shows that the share of deposits in current and savings accounts has increased over the period of one year, while the share in time deposits has decreased. 

Time deposits have decreased by about 10 percentage points in one year. This means that savers do not want to keep their savings in time deposits again after the maturity period of the savings in time deposits is completed, so the share of time deposits in the total deposits has decreased and savings have increased, according to bankers. "Since the interest rates on savings and fixed deposits are not much different, it seems that citizens are keeping their money in ordinary deposits," said Santosh Koirala, President of the Nepal Bankers Association. "Savers are in a wait-and-see mode to see if the interest rates will increase."