Commercial banks have announced a New Year’s gift of slashed interest rates on deposits from Friday, the first day of Bikram Sambat, the official calendar in Nepal.

Sunil KC, president of the Nepal Bankers Association, said that the association decided on Wednesday to lower the interest rates on both fixed deposits and savings to single digits.

“The interest rate on fixed deposits has been brought down to 9.99 from 11 percent,” he said. “The institutional interest rate on deposits has also been slashed to 7.99 percent from 9 percent.”

Earlier in January, banks had slashed the rate on individual fixed deposits by 1 percentage point to 11 percent.

Insiders say that bankers decided to cut the interest rate at the behest of Prime Minister Pushpa Kamal Dahal who has been reiterating that the rate would come down to single digits.

On Tuesday, central bank Governor Maha Prasad Adhikari said that voices from the private sector had been getting louder regarding the high interest rates on loans.

"It is not in the hands of Nepal Rastra Bank to change the rates. The central bank has let the market itself determine the rates for the past 33 years. Interest rates depend on the status of loanable funds," Adhikari said.

The association said that as the amount of loanable funds with the banks had increased, they have decided to reduce the interest rate.

Deposits at the banks and financial institutions increased by Rs280.57 billion in the first eight months of the current fiscal year compared to an increase of 192.12 billion in the same period in previous year, according to Nepal Rastra Bank.

Private sector credit from banks and financial institutions increased by Rs128.18 billion in the review period compared to an increase of Rs522.49 billion in the corresponding period of the previous year.

“There are signs that the economy is headed towards positive territory,” said KC, who is also the chief executive officer of NMB Bank. “We have seen improvements in the external sector of the economy in the past four months.”

Nepal’s remittance earnings swelled by 25.3 percent year-on-year to Rs794.32 billion in the first eight months of the current fiscal year.

As a result of increased remittance earnings, gross foreign exchange reserves went up by 15.2 percent to Rs1,401.21 billion in mid-March 2023 from Rs1,215.80 billion in mid-July 2022, the central bank said.

Of the total foreign exchange reserves, reserves held by Nepal Rastra Bank rose by 17.8 percent to Rs1,244.94 billion in mid-March 2023 from Rs1,056.39 billion in mid-July 2022.

Reserves held by banks and financial institutions, however, decreased by 2 percent to Rs156.27 billion in mid-March 2023 from Rs159.41 billion in mid-July 2022.

Nepali banks have also decided to lower the interest rate on savings.

From Friday, they will pay 5.4 to 7.4 percent interest on general savings. Currently, interest rates on savings range from 6 to 8 percent.

The drop in deposit rates will help lower the cost of deposits, which will further help in the reduction of the base rate.

“It will ultimately help to bring down the interest rate on loans,” said KC. “The results will be visible in the coming months.”

According to central bank regulations, Nepali banks will also have to lower the spread rate—the difference between the interest rate on deposits and the interest rate on loans—from the current 4.4 percent to 4.2 percent from April 14.

“The spread rate has to be brought down further to 4 percent in the last month of the current fiscal year (mid-June to mid-July 2023),” said KC. “It will further cause a reduction in the interest rate for borrowers.”

The impact of the announcement of lower interest rates was instantly seen in the stock market with the NEPSE index closing 92.22 points higher at 1963.55 on Wednesday.

On Tuesday, the NEPSE was up 27.31 points with the share prices of all 218 listed companies showing gains.