Commercial Banks’ Deposit Rates Declining – Good or Bad?

Deposit rates are a key signal of both liquidity conditions and the balance between savings and lending in the financial system. In Nepal, the weighted average deposit rate of commercial banks has steadily fallen in recent years. After peaking at 7.41% in FY 2021/22 and rising slightly to 7.86% in FY 2022/23, rates declined to 5.77% in FY 2023/24, and further to 4.19% in FY 2024/25. By mid-August 2082/83 (2025/26), deposit rates had slipped even lower to 4.02%, reflecting surplus liquidity and subdued credit demand.

For depositors, declining rates can be seen as a negative trend. Lower returns on savings accounts and fixed deposits reduce household income from financial savings, discouraging people from parking money in banks for long-term returns. In a country where remittance inflows form a large share of deposits, low interest earnings may reduce incentives for households to channel remitted money into the formal banking system, potentially diverting funds into alternative investments like gold, real estate, or informal lending.

From the perspective of borrowers and businesses, however, falling deposit rates are largely positive. Lower funding costs for banks translate into lower lending rates, making credit more affordable for households and firms. For example, the weighted average lending rate has already come down from 12.30% in FY 2022/23 to 7.76% by mid-August 2082/83. This creates opportunities for cheaper financing of housing, business expansion, and industrial projects, which can stimulate investment and support growth.

At the macro level, declining deposit rates reflect improved liquidity conditions in the financial system, thanks to record-high foreign exchange reserves and steady remittance inflows. However, the downside is that low deposit rates may fail to attract long-term savings, limiting banks’ ability to mobilize stable funds for large-scale projects. If households feel discouraged to save in banks, this could gradually weaken financial intermediation.

In short, declining deposit rates are a double-edged sword: they benefit borrowers by lowering credit costs but hurt savers by eroding returns. The challenge for policymakers and banks is to strike a balance—ensuring rates remain attractive enough to encourage deposits while low enough to support affordable lending and stimulate investment.