Interest rates on loans fall to single-digit as coronavirus hits banking industry

KATHMANDU: Nearly a dozen commercial banks have published their new interest rates. The new interest rates, effective from Ashoj 1 (September 17), have fallen drastically as the banking sector is flush with loanable funds amid the slowdown in economic activities in recent months.

Not only deposit rates, banks have also started to cut lending rates.

Bank and financial institutions generally revise their interest rates at an interval of three months (quarter). Almost all commercial banks including Civil Bank, Sunrise Bank, Himalayan Bank, NCC Bank, RastriyaBanijya Bank (RBB), Standard Chartered Bank Nepal (SCBN), Nabil Bank and NMB Bank have lowered their interest rates as the demand for bank loans has slumpedsignificantly due to the COVID-19 pandemic.

The interest rates on some loans have fallen to a single-digit level after remaining at a higher side for over four years. Interest rates had gone through the roof in the last three years as banks were struggling due to the shortage of lendable funds. The high interest rates had prompted a backlash from the private sector.

The pandemic has now reversed the trend. Personal loans like home loan and auto loan have become cheaper.

As most of the banks have reduced their base rate, those who have borrowed from banks and financial institutions are also likely to benefit as they will now have to pay a lower amount of equated monthly installment (EMI). Banks charge a certain percent of premium on their base rate to fix their lending rates. The interest rate on any loan is tied with the base rate calculated by the bank factoring in their cost of fund, operational expenses and all other expenses. This means that the lending rate of any bank tends to move up or down in line with the bank’s base rate of the preceding quarter.

The state-owned RBB’s interest rate is one of the lowest in the market. With a base rate of 5.8 percent, it charges up to 3.25 percent premium on such base rate as interest rate on loans. The saving rate that the state-owned bank is offering is also one of the lowest. It now offers three to five percent on savings while the maximum interest it is offering on fixed deposits is just six percent.

The joint-venture, SCBN, has also lowered its interest rates. It is now offering three percent on savings deposit while the interest rate for fixed deposits for individuals has been set at a maximum of 6.75 percent.

However, even the cheaper borrowing cost has not been able to increase the investments of banks as the private sector has either cancelled or postponed their new business projects amid the growing uncertainty caused by the outbreak of the coronavirus.

Bankers say that there has not been a significant growth in their investments except a slight improvement in loans for import financing on the eve of the festive season and top-up of loans by existing borrowers in recent months.
The latest figures show that bank loans have jumped by Rs 20 billion in the last three weeks. According to data compiled by Nepal Bankers’ Association, the total lending of 27 commercial banks surged to Rs 2.81 trillion on September 4 from Rs 2.79 trillion on August 14.

As recovery of businesses looks uncertain, banks are now focusing on a business strategy to attract borrowers towards the personal loan segment. Many banks have already introduced schemes offering home loans with various offers including the cheapest rates in the history of the country.

For instance, Bank of Kathmandu is currently providing home loan at 8.99 percent with an offer of the interest rate remaining unchanged for one year. Other banks have also been offering attractive interest rates on home loans.
Banking executives say they are less optimistic about any recovery in the growth of loans and interest rates anytime soon as the uncertainty resulting from the pandemic still grips the economy.