The share of fixed deposits of commercial banks in total desposits soared to 42.5 percent over the first 11 months of the last fiscal year as depositors rushed to park their savings lured by high returns. 

Faced with a shortage of loanable funds, commercial banks jacked up the average interest rate to 9 percent per annum from 6 percent, prompting depositors to invest in fixed deposits.

The portion of fixed deposits in the total deposits mix of commercial banks was 29.7 percent in the beginning of the fiscal year, according to Nepal Rastra Bank (NRB). 

Meanwhile, the portion of savings and call deposits, which are relatively cheaper types of deposits offering lower interest rates, has gone down. The portion of savings deposits in total deposits had dropped to 34.1 percent by mid-June from 40.2 percent in mid-August. 

Similarly, the contribution of call deposits in the total deposits mix has come down to 13.9 percent from 19.8 percent over the review period. 

The change in the deposit mix of commercial banks indicates that the lending rate is unlikely to come down any time soon as their cost of funds has gone up significantly. 

As the maturity period of a majority of such fixed deposit accounts is one year, according to bankers, there are less chances of the lending rate coming down soon although it will not increase further.  

“Almost 90 percent of the fixed deposits in commercial banks have a maturity period of one year,” said Bhuvan Dahal, CEO of Sanima Bank. “Therefore, the lending rate will not come down in the current fiscal year even if the banks wish to reduce it.”

This is expected to dampen the confidence of investors planning to expand businesses or set up new enterprises. Representatives of the private sector have been requesting NRB to take immediate measures to bring down the interest rate on loans. 

Nabil Bank CEO Sashin Joshi said the cost of funds of banks had gone up, and that they would not be able to bring down the lending rate for at least three to six months. However, bankers claimed that the lending rate would not rise further. 

“Bank deposits are gradually increasing, and banks can’t keep their funds idle so slowly there will be lending pressure on them,” said Joshi. “Hence, I don’t see the lending rate growing further.” 

According to Joshi, the expectation of large institutional depositors has also eased recently. “Therefore, the cost of deposits will not go up further,” he added. 

Currently, commercial banks are offering loans to the corporate sector at 10 to 12.5 percent per annum, while lending rates for small and medium enterprises range from 12 to 15 percent. Consumer loans, such as home and auto loans, on the other hand, are being offered at interest rates as high as 15 to 16 percent per annum.

This is not the first time Nepal has faced this kind of problem. In 2010-11, a severe credit crunch triggered by a slump in the real estate sector led to lending rates going up. It was around 18 months before lending rates normalized.