Banks Update Interest Rates; Base Rates Falling; How will this Affect the Stock Market?

Compliant to NRB's instruction to only update interest rates once a month, a lot of banks/financial institutions have updated their interest rates today. The update will be effective from today, the first day of the month of Poush.

The rise in the NEPSE index is partly fueled by the slashing interest rates caused by excess liquidity. Thus, the fluctuation in interest rates is of interest to investors. In general, a fall in interest rates is followed by a rise in the securities market. This was also evident in the trend of the NEPSE as banks began to cut interest rates during the Covid-19 pandemic.

In this article, we analyze the change in interest rates of commercial banks. Those who did not bring any significant change to their interest rates profile are ignored in this study.

What is different this time

In the review of the first quarter of FY 2077/78, the Nepal Rastra Bank had brought a new provision with hopes that banks will reverse the falling trend in interest rates. 

The provision was that banks are not allowed to have a difference of more than 5 units in the interest rate range that they provide. For instance, if a bank gives an 8% interest payment on fixed deposits, it can't give interest lower than 3% in other savings schemes. However, this isn't applicable to call deposits. 

Since banks have been giving higher interest payments on fixed deposits, the central bank hoped that they would raise the interest rates on savings. However, banks seem to have done the exact opposite. They have now lowered their interest rates on fixed deposits instead of raising the rates on savings. 

Since a significant portion of cash is saved in banks as fixed deposits, many investors speculate this pool of money might be poured into the stock market in hopes of more attractive returns. Now, this might happen directly from the depositors or indirectly from institutions. Nonetheless, supposing that the recent rise in NEPSE is attributed to falling interest rates, this new scenario might become an extra source of fuel to the fire. 

Change in Savings

While Mega Bank Limited (MEGA) previously gave interest payment in the range of 3-5% p.a. for savings, the bank has reduced this range to 2.5-4.5%. The range is 2.5-4.5% for Century Commercial Bank too. Nepal SBI Bank has also followed suit to further reduce the interest rate on savings. It now only provides interest payment in the range of 1.5-3%, compared to the previous range of 3-4.5%. The banking giant Nabil Bank also provides a low interest-range of 1.5-3.5%.

For savings, Sunrise Bank and Bank of Kathmandu give interest payments in the range of 2-3.5% depending on the savings scheme while Nepal Bank Limited gives in the range of 2-4%.

Change in Fixed Deposits

Now, an individual depositing their money in fixed deposits in Mega Bank will get interest payment in the range of 6.5-7.5%. Meanwhile, they will get interest payments in the range of 3-6.5% in Nepal SBI Bank. The interest payment depends on the maturity period of the fixed deposits. Except in a few circumstances, fixed deposits with a longer maturity period generate a higher interest per annum.

At Sunrise Bank, depositors will get a flat 7% interest payments per annum for fixed deposits with a maturity period of three months or higher. In Nepal Bank Limited, the highest interest rate on FDs is 7% and the lowest is 5.5%.

Prime Commercial Bank, on the other hand, will give an 8% interest payment per annum for all fixed deposits with a maturity period longer than a year.

Change in margin loan and base rate

While some commercial banks tie their margin loan interest rates with the base rate, some mention a numeric range.

For instance, margin loans will be provided at anywhere from 0-4.5% interest rates in Mega Bank Limited. Nepal Bank Limited also gives margin loans in the interest rate range of 2.05-5.02%. Meanwhile, in Nepal SBI Bank, the interest rate can get up to 5% higher than the bank's base rate of 8.37%. The base rate has declined in the case of Nepal SBI Bank. It previously had a base rate of 8.39%.

This is also the case with Sunrise Bank and Global IME Bank where the interest rate on margin loans can get up to 6% higher than their respective base rates. It is worth mentioning that Sunrise Bank's base rate has been slashed to 7.51% from the previous figure of 7.8%. Meanwhile, Global IME Bank's base rate stands at 7.25%.

Century Commercial Bank has also followed suit in the interest rates slashing trend. While it previously had a base rate of 8.68%, the figure is now brought down to 8.43%. The base rate of the Bank of Kathmandu has fallen down a tiny bit to 7.68% from the previous 7.7%. Furthermore, the banking giant Nabil Bank has also reduced its base rate to 6.37% from the previously maintained figure at 6.74%.