Nepal's Mid-Year Review Shows Falling Interest Rates Amidst Liquidity Surplus

Kathmandu. The Ministry of Finance has published the mid-term evaluation report for the budget of the current fiscal year 2082/83. According to the public details, there has been a significant decrease in interest rates at banks and financial institutions, while a sluggish pace of credit disbursement compared to deposit collection has led to an accumulation of investable funds (liquidity) in banks.

According to government statistics, the average interest rate on loans disbursed by commercial banks has fallen into the single digits, settling at 7.12 percent. In the same period last year (Poush end), this interest rate was 8.69 percent. The loan interest rate has decreased by about one and a half percentage points over the year. The loan interest rate for development banks has dropped to 8.34 percent, and for finance companies, it is at 9.73 percent. As loans become cheaper, the interest received by depositors has also decreased. The weighted average interest rate on deposits for commercial banks is limited to 3.56 percent, down from 4.75 percent in the previous year.

In the first six months of the current fiscal year, deposit collection at banks and financial institutions has been encouraging, but credit disbursement has been only half of that amount. During the review period, total deposits increased by NPR 417.48 billion to reach NPR 76,813.5 billion, marking a 5.7 percent growth. However, loans going to the private sector increased by only NPR 197.47 billion during the same period. Currently, a total of NPR 56,951.7 billion in loans has been disbursed to the private sector. The fact that deposits increased by over NPR 400 billion in six months while loans did not even reach NPR 200 billion indicates low demand for credit in the market and an accumulation of funds with the banks.

With excess liquidity in the market, Nepal Rastra Bank has withdrawn money through various instruments. During the review period, the central bank absorbed a net liquidity of NPR 286.99 billion through deposit collection auctions and standing deposit facilities. In the same period last year, liquidity absorption was NPR 139.99 billion. As money is abundant in the market, the interbank lending rate has also decreased to 2.75 percent. Similarly, the interest rate on 91-day Treasury Bills is limited to 2.35 percent.

Looking at the money supply situation in the economy, broad money supply increased by 5.4 percent in the current fiscal year. Last year, this growth rate was only 3.9 percent. Examining the structure of total deposits at banks and financial institutions, fixed deposits account for the largest share at 42.8 percent, and savings deposits account for 41.3 percent. Current deposits constitute only 6.9 percent, according to the ministry's report.