 24th September 2022, Kathmandu

The main basis for determining the interest rate of the loan given by the bank is the base rate. Banks can set the interest rate by adding a premium of 0 to 7 percent to the base rate. Banks and financial institutions have to determine the interest rate of the loan while disbursing loans to their customers.

The loan interest rate is linked to the base rate. The base rate always fluctuates every three months. This will be an automatic increase.

Banks have no hand in this being upside down. The base rate is not the actual interest rate of the loan, it is only the basis for determining the interest rate. Generally, the base rate plus one percent is said for the loan.

Let’s say the base rate is 8 percent, and if you add one percent, the interest becomes 9 percent. If the base rate decreases to 7, it will be 8 percent by adding one more. Therefore, the illusion that banks reduce interest rates on deposits but not on loans is false.

When there is a lack of liquidity in the market, interest rates on both loans and deposits increase. Whether the interest rate will increase or decrease depends on the deposit. How easy is the deposit to come? If it comes in a large amount, then the interest rate of the loan will also come down.

There are four components to calculating the base rate: Cost of funds, Operating costs, the minimum rate of returns, and Cost of the Cash Reserve Ratio. The biggest component is the Cost Of the Fund.

Cost Of Fund is the interest paid between the depositors. If the conditions of tomorrow’s deposits become easier, it will have a direct effect on the base rate and the base rate will go down. In that case, the interest rate of the loan will automatically decrease.

## How to calculate the Base rate?

The following method should be followed while calculating the base rate.

Base Rate = Cost of Fund + Opportunity Cost of maintaining CRR + Opportunity Cost of maintaining SLR + Operating Costs

Here,

Cost of Fund = Weighted average cost of deposits, debentures, and borrowings for the month

Cost of maintaining CRR = Average CRR to be maintained for the month x Average Cost of Fund / Deployable Funds

Cost of maintaining SLR = (Average SLR to be maintained – Average CRR maintained) x (Cost of Fund – Average return on Govt. Securities) / Deployable Funds

Operating Costs = Expenses for the month x 85%* x 12** / Deployable Funds

Deployable Funds = Average Deposits + Average Debentures and Borrowings – Amount maintained as SLR