Untitled design - 1
17th October 2025, Kathmandu
The financial landscape in Nepal is undergoing a notable transformation, as commercial banks nationwide have officially published their revised interest rates for the month of Kartik (mid-October to mid-November).
Commercial Banks Reduce Interest Rates
This announcement confirms a significant and consistent downward trend in deposit rates, a move that carries far-reaching implications for both individual savers and prospective borrowers across the Nepali market. The easing of rates signals a shift in the banking sector’s strategy, moving away from aggressive deposit mobilization towards managing a surplus of funds, a condition known as excess liquidity. According to the latest aggregated data, the average maximum interest rate offered on individual fixed deposits has seen a noticeable drop. The rate, which stood at 5.46% in Bhadra, has now decreased to 5.20% for Kartik. This reduction of 0.26 percentage points in just one month highlights the current pressure on banks to reduce their cost of funds. This softening of deposit rates is the natural precursor to a potential reduction in the cost of borrowing, which could be a much-needed stimulus for an economy seeking renewed momentum in investment and growth.
The New Interest Rate Landscape for Kartik: Who is Cutting and Who is Holding?
The decision to cut rates was not unanimous, yet the majority of the market is trending downwards. Out of the 20 commercial banks currently operating in Nepal, a significant majority—specifically 14 banks—have chosen to lower their interest rates for Kartik. This collective action is a strong indicator of the prevailing market conditions, where a glut of deposits is making high-interest payouts unsustainable for many financial institutions. On the other hand, 6 commercial banks have opted to maintain their interest rates at the same level as the previous month, Asoj. These institutions include major players such as Nepal Bank, Siddhartha Bank, Rastriya Banijya Bank, Kumari Bank, Global IME Bank, and Himalayan Bank. Their decision to hold steady might reflect a strategic choice to retain existing large depositors or a slightly different liquidity position compared to their competitors. The reduction was particularly aggressive among a few banks. Machhapuchchhre Bank and NMB Bank led the charge by implementing the largest rate cut, reducing both individual and institutional fixed deposit rates by a substantial 1 percentage point. This deep cut by prominent banks often sets a competitive benchmark, exerting further pressure on the rest of the market to follow suit. Similarly, the trend of declining rates is mirrored in the institutional fixed deposit segment, where the average maximum interest rate has also decreased by 0.22 percentage points. This holistic rate reduction across both individual and institutional deposits underlines the widespread nature of the excess liquidity challenge facing the banking industry
Understanding the Drivers: Why Banks Have Excess Liquidity
The primary force behind this consistent reduction in deposit interest rates is the issue of excess liquidity within the banking system. Simply put, banks currently possess more money (deposits) than they are lending out (loans). This situation has arisen primarily due to two interconnected macroeconomic factors: Sluggish Credit Demand: Economic activity, while showing signs of recovery, has not generated a robust demand for credit, particularly from the private sector, for large-scale investment projects. Businesses are cautious about borrowing for expansion due to various uncertainties, leaving the substantial funds mobilised by banks idle. Increased Inflows: Favourable external sector conditions, including a strong inflow of remittances and a surplus in the Balance of Payments (BoP), continue to pump foreign currency into the country. These funds are eventually converted into Nepali Rupees and land in commercial bank accounts, swelling their deposit bases .When banks have more money than they can profitably lend, the cost of holding that money—the interest paid to depositors—becomes a burden on their profitability. By lowering deposit rates, banks directly reduce their Cost of Funds (CoF). This reduction is critical because the CoF is the largest component in the calculation of the Base Rate, which is the minimum interest rate at which a bank can offer loans. Therefore, the cut in fixed deposit rates is a proactive measure by the banks to manage their balance sheets and set the stage for a lower Base Rate in the coming months, which is a necessary step to stimulate loan growth.
The Economic Ripple Effect: Lower Loan Rates and Investment Hope
For the broader economy, the decline in deposit rates is typically welcome news, as it paves the way for a reduction in loan interest rates. A lower Base Rate means banks can afford to offer loans at lower premiums, bringing down the overall cost of borrowing for households and businesses. This expected easing of lending rates can serve as a powerful economic catalyst. Cheaper credit encourages the private sector to take on new projects, invest in capital goods, and expand operations. For individual consumers, lower loan rates translate to reduced Equated Monthly Instalments (EMIs) on housing loans, auto loans, and personal loans, thereby increasing disposable income and potentially boosting aggregate demand and consumption. The Central Bank, Nepal Rastra Bank (NRB), closely monitors this trend, as lower interest rates are generally consistent with a monetary policy stance aimed at supporting economic recovery by making capital more accessible. Furthermore, lower rates help commercial banks manage their Spread Rate—the difference between the interest earned on loans and the interest paid on deposits. As per NRB directives, banks are required to maintain this margin within a specified limit. When deposit rates fall due to excess liquidity, it gives banks the necessary room to also lower their lending rates while still adhering to regulatory requirements and protecting their core interest income.
Navigating the New Normal: Advice for Savers and Investors
While borrowers cheer the prospect of lower interest rates, depositors, especially those who rely on fixed deposit income, face the challenge of diminished returns. An average maximum individual fixed deposit rate of 5.20% makes it challenging for savers to earn a real return after factoring in inflation. For depositors, this environment necessitates exploring alternative investment avenues:
Remittance Deposits: Banks are permitted to offer a premium on deposits sourced from remittances. These products typically offer $1$ percentage point higher interest than regular fixed deposits, making them an attractive option for those with income from overseas.
Capital Market: As interest rates on bank deposits become less appealing, capital may shift towards the equity market (NEPSE), seeking higher potential returns, provided the investor has a higher risk appetite.
Longer-Term Locking: Given the current downward trajectory, locking funds into long-term fixed deposits (two years or more) might be a better strategy to secure the current rate for a longer duration before further cuts take place.
The latest interest rate announcement for Kartik solidifies a significant trend of rate easing in Nepal’s financial sector. Driven by a liquidity surplus and muted credit demand, this move directly lowers the cost of funds for banks, which is a crucial first step toward making credit more affordable. As the market anticipates a subsequent drop in lending rates, the focus shifts to how effectively this cheaper capital can be channeled into productive sectors to fuel the nation’s long-term economic prosperity.
For More: Commercial Banks Reduce Interest Rates