Banking Khabar / Nepal’s banking sector has witnessed a major shift in deposit interest rates over the past five years. At one point, banks were offering interest rates as high as 12 to 13 percent to attract deposits, whereas now most banks are barely providing around 4 percent on fixed deposits. This sharp decline in interest rates has directly affected the income of millions of savers. Elderly citizens, pensioners, returnees from foreign employment, and middle-class families who relied on bank interest as a regular source of income appear to be the most affected. Why interest rates in Nepal’s banking system have fallen, how this has impacted depositors, and what its future consequences may be have now become central topics of economic debate.
Five years ago, when the COVID-19 pandemic began, Nepal’s economy entered an unusual and uncertain phase. Industries and businesses shut down, economic activities slowed significantly, and demand for loans started to decline. During that period, deposits in banks continued to rise, but investment opportunities remained limited. As a result, banks began offering lower interest rates on deposits. At that time, average fixed deposit interest rates were limited to around 5 to 7 percent.
However, the situation changed dramatically afterward. Following the pandemic, imports surged sharply, liquidity shortages began to emerge in the market, and banks faced a crisis of investable funds. Banks competed aggressively to attract deposits. Due to this intense competition, deposit interest rates reached historic highs during 2021 and 2022 (2078 and 2079 BS). Some commercial banks started offering more than 12 percent interest on fixed deposits, while development banks and finance companies proposed even more attractive rates.
That period was considered highly beneficial for savers. For example, a person depositing Rs. 1 million in a fixed deposit could earn up to Rs. 120,000 annually in interest income. Many viewed bank interest as a safe and reliable source of earnings. Retired employees, pensioners, and citizens returning from abroad began planning their daily expenses around the interest income generated from their savings.
But now, the situation has completely reversed once again. Over the past two years, Nepal’s economy has remained sluggish. Real estate transactions have declined, industries and businesses have failed to expand, the private sector has become hesitant to invest, and demand for loans has weakened. Meanwhile, bank deposits have continued to increase. The crisis seen in the cooperative sector has also pushed many citizens to withdraw their money from cooperatives and deposit it in banks, resulting in excess liquidity within the banking system.
When banks have sufficient liquidity and loan demand remains weak, they no longer feel the need to offer high interest rates to attract deposits. This is why most banks are currently offering only around 4 to 6 percent interest on fixed deposits, while savings account interest rates have fallen to the range of 2 to 3 percent.
This has caused direct financial losses for depositors. A few years ago, a person with Rs. 1 million in a fixed deposit could earn more than Rs. 100,000 annually in interest income. Today, the same amount generates only around Rs. 50,000. In other words, their interest earnings have declined by more than half.
Another serious aspect of this issue is inflation. As the prices of goods and services continue to rise, lower bank interest rates have created additional challenges for savers. For example, if a bank provides 5 percent interest while inflation stands at 7 percent, the real value of the depositor’s money is effectively declining. In economics, this is known as a “negative real return.” This means that although money deposited in banks remains secure, its purchasing power continues to weaken over time.
The greatest impact appears to have fallen on senior citizens and pensioners. Many had deposited their lifetime savings in banks and relied on interest income to cover medicine, healthcare, and daily living expenses. With interest rates declining, their monthly income has dropped significantly. Some have already started spending their savings, while others are facing financial stress.
Middle-class families have also been affected. In particular, families who returned from foreign employment and planned to rely on bank interest as a stable source of income are now disappointed. As the prospect of managing household expenses through bank interest has weakened, many have begun searching for alternative investment options.
Meanwhile, banks themselves have benefited to some extent. Lower interest payments on deposits have reduced banks’ “cost of funds,” helping improve their profitability. However, growing dissatisfaction among savers also raises concerns that public trust in the banking system could weaken in the long run.
At present, many people dissatisfied with low bank interest rates are becoming more attracted to the stock market, gold, real estate, and mutual funds. However, these sectors carry higher risks and may not be suitable for everyone. Banks are still regarded as a safe medium for savings, but their attractiveness in terms of returns is gradually declining.
The Nepal Rastra Bank also appears to have adopted a policy aimed at maintaining stable interest rates and stimulating the economy. To make loans cheaper, the central bank has provided banks with a more accommodative monetary environment. If industries and businesses expand in the coming days, loan demand increases, and the economy regains momentum, interest rates may rise somewhat. However, the likelihood of interest rates returning soon to the levels of 12 or 13 percent seen a few years ago appears low.
Overall, the past five years have become a period of extreme interest rate fluctuations in Nepal’s banking history. On one hand, banks are currently flooded with liquidity, while on the other hand, depositors’ incomes have shrunk considerably. Although lower interest rates have made the banking system more comfortable, they have also significantly affected the financial plans of millions of depositors.
Today, the main question has become: “Money in banks may be safe, but can it still provide enough returns to sustain people’s lives?” This question is likely to shape the future of Nepal’s banking system and its savings culture.
Banks Have Lowered Interest Rates Again in the Month of Jestha
Banks have once again reduced interest rates for the month of Jestha. Despite extremely weak credit flow, interest rates continue to decline. Banks publish their interest rate lists for the following month on the last day of every month. Most banks have fixed the maximum interest rate on individual fixed deposits between 4 and 4.5 percent.
In the month of Jestha, seven banks reduced the maximum interest rate on individual fixed deposits, while thirteen banks kept their rates unchanged. Compared to the month of Baisakh, the average maximum interest rate offered by commercial banks on individual fixed deposits declined by 0.0595 percentage points to 4.343 percent. In Baisakh, the average maximum interest rate on individual fixed deposits stood at 4.4025 percent.
The seven banks that reduced interest rates in Jestha are Citizens Bank International, Himalayan Bank, Kumari Bank, Nepal Bank, NIC Asia Bank, NMB Bank, and Standard Chartered Bank Nepal.
Similarly, the banks that maintained stable interest rates are Agricultural Development Bank, Everest Bank, Global IME Bank, Nepal Investment Mega Bank, Laxmi Sunrise Bank, Machhapuchchhre Bank, Nabil Bank, Nepal SBI Bank, Prime Commercial Bank, Prabhu Bank, Rastriya Banijya Bank, Sanima Bank, and Siddhartha Bank.
For Jestha, NMB Bank has set the highest maximum interest rate at 4.80 percent. However, the bank stated that this rate will only apply to individual fixed deposits with a tenure of five years or more. No bank will offer interest rates above 4.8 percent on individual fixed deposits anymore.
