It seems unlikely that the banks will bring down their interest rate on loans as the third quarter results show that the base rate of 20 commercial banks stood at above 10 per cent.
Base rate is calculated on the basis of expenses incurred by the banks and financial institutions to collect deposits, plus 80 per cent of the bank’s overhead expenses (on staff and rent), plus up to 0.75 per cent profit. If a bank’s returns on government securities is lower than deposit collection rate, they can add the shortfall in the base rate.
Out of the 28 commercial banks in operation, government-owned Rastriya Banijya Bank and Nepal Bank have low base rate at 6.2 per cent and 7.11 per cent, respectively. These banks are in a comfortable position in terms of deposit collection as they operate the government accounts and are not under pressure to offer high interest rates on deposits.
Apart from these two banks, Standard Chartered, Nabil, Everest, Nepal Investment, Himalayan and SBI have not crossed the 10 per cent threshold in base rate, as per the unaudited financial statements published by the commercial banks.
Banks have to mandatorily publish the base rate every three months. The banks will now have to make adjustments in the interest for the fourth quarter of this fiscal as per the changes in their base rate. While comparing the base rate of the first half, Rastriya Banijya Bank has brought down the base rate from 9.71 per cent to 6.2 per cent. However, base rate of aforementioned ‘efficient’ banks slightly increased in the third quarter compared to the first half.
Another government bank, Agricultural Development Bank, has highest base rate of 12.72 per cent in the industry, which is more than double the lowest base rate of Rastriya Banijya Bank.
Base rate is also used to gauge the efficiency of the banks. Banks that have low base rate can offer loans at lower interest rate.
Base rate of four banks — Agricultural Development Bank, Civil Bank, Century Bank and Nepal Credit and Commerce — have high base rate of above 12 per cent. Majority of banks have maintained their base rate between 11 and 12 per cent. Prabhu Bank, Sanima Bank, Bank of Kathmandu and NMB Bank have maintained base rate in between 10 and 11 per cent.
Three banks have breached the regulatory provision in interest rate spread — the difference between interest rate in deposit and lending, which should not cross the threshold of five percentage points. However, the interest rate spread of Agricultural Development Bank, Nepal SBI Bank and Standard Chartered stood at 5.61 per cent, 5.24 per cent and 5.23 per cent, respectively.
High base rate of the banks in the third quarter points towards the possibility that the interest rate on credit could go up. However, bankers have said that if the government’s expenses go up in the last quarter, the cost of the deposit collection could go down along with availability of fresh deposits.