Deposit Interest Rates Continue to Fall as Excess Liquidity Weighs on Banks

Kathmandu — Commercial banks in Nepal have further lowered deposit interest rates for the month of Poush, extending a downward trend that has persisted for several months. The latest revisions indicate that returns for depositors are continuing to shrink, reflecting weak credit demand and sustained excess liquidity in the banking system.

Despite steady growth in deposits, banks have struggled to expand lending in line with expectations. Private sector credit growth has remained sluggish, while deposits have continued to accumulate. This imbalance has resulted in surplus liquidity, reducing banks’ need to compete aggressively for deposits and pushing interest rates steadily downward.

Average Individual Fixed Deposit Rates Slip Below 5 Percent

For Poush, 13 out of 20 commercial banks reduced the maximum interest rate on individual fixed deposits compared to Mangsir. As a result, the average maximum rate fell by 0.31 percentage points, declining to 4.73 percent from 5.04 percent a month earlier.

This marks a notable shift, as the average deposit rate has now fallen below the 5 percent level, highlighting the depth of the ongoing rate-cut cycle. Bankers say the decline is primarily driven by liquidity conditions rather than competitive pressures.

Banks Leading the Rate Reductions

Among the banks implementing the largest cuts, Prime Commercial Bank, Global IME Bank, and Rastriya Banijya Bank reduced their maximum individual fixed deposit rates by 0.5 percentage points each. Prabhu Bank and Agriculture Development Bank followed with 0.4 percentage point reductions, while Kumari Bank lowered its rate by 0.38 percentage points.

Analysts note that banks with relatively stronger deposit inflows are adjusting rates to discourage further accumulation of funds, as holding excess liquidity increases regulatory and opportunity costs.

Several Banks Maintain Previous Rates

In contrast, seven commercial banks opted to keep their deposit rates unchanged for Poush. Citizens Bank, Machhapuchhre Bank, NIC Asia Bank, Siddhartha Bank, Nepal Investment Mega Bank, NMB Bank, and Himalayan Bank continued with the same individual fixed deposit rates as in Mangsir.

This divergence reflects differences in liquidity positions and funding strategies, with some banks prioritizing depositor stability over immediate cost reduction.

Highest and Lowest Deposit Returns

For Poush, Global IME Bank and Himalayan Bank are offering the highest maximum individual fixed deposit rate of 5.5 percent, while Prime Commercial Bank is offering the lowest rate at 4.25 percent.

The narrowing gap between the highest and lowest rates suggests a convergence in pricing strategies, reinforcing expectations that deposit rates will remain under pressure in the near term.

Institutional Deposit Rates Also Decline

The downward trend has extended to institutional fixed deposits as well. Compared to Mangsir, the average maximum institutional deposit rate declined by 0.22 percentage points, falling to 3.36 percent.

During Poush, five commercial banks reduced institutional deposit rates, while the remaining 15 banks kept rates unchanged. Given the large volume of institutional deposits, even modest rate adjustments significantly affect banks’ funding costs.

Liquidity Conditions Drive the Trend

Banking experts attribute the sustained decline in deposit rates to structural excess liquidity, driven by weak investment activity, cautious borrowing behavior, and limited expansion in productive sectors. While deposit growth has continued due to the lack of alternative investment avenues, lending has not kept pace.

As a result, banks are focusing more on liquidity management rather than deposit mobilization, which is likely to keep deposit rates subdued unless credit demand strengthens.

Implications for Depositors and the Economy

For depositors, falling interest rates mean lower real returns, particularly in an environment where household expenses remain elevated. Over time, this could encourage savers to explore alternative investment options, including capital markets, though risk appetite remains cautious.

From a broader economic perspective, persistently low deposit rates signal muted economic momentum, suggesting that monetary easing alone may not be sufficient to stimulate lending without stronger business confidence and investment demand.

Outlook Remains Weak

Given current trends, bankers and analysts do not expect a near-term recovery in deposit interest rates. Unless credit growth accelerates or liquidity conditions tighten, deposit rates are likely to remain low in the coming months.

The Poush data clearly indicates that Nepal’s banking sector is currently grappling more with managing surplus funds than attracting new deposits.