Interest Rate On Loan Declines By 2.5 Percent
December 28, 2020 | Investopaper
The interest rate on loans has decreased by an average of 2.5 percentage points in the month of Karthik of the current fiscal year as compared to the corresponding period of the previous fiscal year. The high liquidity in the BFIs has led to increased competition among banks, thus lowering the interest rates on deposits as well as loans.
According to the NRB, the weighted average interest rate on loans from banks and financial institutions was 9.52 percent in Karthik of this fiscal year. This is a decrease of 2.55 percentage points compared to the same period of the previous fiscal year. The weighted average interest rate on loans was 12.07 percent in Karthik, 2076.
Similarly, the interest rate on deposits has declined by an average of 1.5 percentage points in the first four months of the current fiscal year as compared to last year. The weighted average interest rate on deposits, which stood at 6.81 percent in Karthik 2076 BS, has remained at 5.31 percent till Karthik 2077 BS.
The average base rate of commercial banks has declined by about 2 percentage points in a year. The average base rate of commercial banks stood at 7.57 percent in Karthik, 2077 BS compared to 9.50 percent in the same period of the previous year.
Interest rates on loans to banks and financial institutions are projected to decline further due to lack of investment environment brought down by COVID. As of last Poush 10, 2077 BS (Dec25, 2020 AD), there is about Rs 200 billion more liquidity in the financial system. If the demand for loans does not increase in the coming days, there will be more liquidity.
Through the semi-annual review of monetary policy, NRB has directed the BFIs not to make the interest rate differential less than 5 percent. This means that banks and financial institutions should reduce the interest rate difference between time deposits and ordinary deposits to less than 5 percent. NRB brought this provision after the banks started giving high interest on time deposits and low interest on ordinary savings.
When interest rates on deposits are low, depositors are discouraged from saving. When you don’t save in the bank, there is a lot of cash in the hands of the general public. When there is a lot of cash, more is spent in unproductive areas. Cash flows into the informal sector. It does not benefit the economy. There is a possibility of capital flight to India and other countries due to low interest rate.
