Banks Compete to Attract Borrowers by Lowering Interest Rates Amid Excess Liquidity and Weak Loan Demand

Excess liquidity and low loan demand within the financial system have triggered a competition among banks to attract borrowers by reducing interest rates. According to Nepal Rastra Bank, approximately NPR 1.3 trillion is currently available as investible funds in the financial system, yet loan demand remains sluggish. Santosh Koirala, president of the Nepal Bankers’ Association, noted that towards the end of the fiscal year, banks have focused more on loan recovery than on disbursing new loans.

Kathmandu, 5 Ashar – With the growing complexity of excess liquidity within the financial system, banks and borrowers have begun to play with declining interest rates. This has resulted in competition where banks attempt to draw borrowers from rivals by offering lower rates. As of mid-April of the current fiscal year, loans disbursed by banks to the private sector totaled NPR 312 billion, which is NPR 5.6 billion less compared to the same period in the previous fiscal year.

Banks have started attracting customers from other banks by offering loans at benchmark rates. The CEO of a commercial bank stated, “There is no demand for loans, and interest has to be paid as soon as deposits come in.” Meanwhile, the average maximum interest rate on personal term deposits by commercial banks stood at 4.27 percent in the month of Ashar, while the average interest rate on loans in Jestha was 6.73 percent.

Krishna Bahadur Adhikari, CEO of Nepal Infrastructure Bank (NIFRA), said, “The growing dissatisfaction between clients and banks has led to a trend of shifting loans.” Currently, interest rates have declined, with banks offering fixed interest rates ranging from 7 to 9 percent. This environment has likely encouraged customers to transfer loans, contributing to the current situation.