What is the interest rate offered by commercial banks after NBA calls end of gentleman’s agreement?

~Rishab Agrawal

Some time back, members of Nepal Bankers’ Association (NBA) entered into a gentleman’s agreement to put a cap on the interest rates provided by banks on savings and fixed deposits.  As per the agreement, interest rate on fixed deposits could not exceed 10.50% p.a. for institutional depositors and 11% p.a. for individual investors. Similarly, the banks could provide interest on saving deposit for interest rate up to 7% p.a. An additional 0.5% on the above mentioned rates was under the discretion of respective banks.

Recently, NBA decided to end this agreement and lift restrictions on commercial banks regarding the interest rate offered on fixed deposit accounts. Since then, commercial banks have went into a spree to increase the interest rates. The current interest rates on fixed deposits (1 year and above) and savings account offered by all listed commercial banks are as follows:

Currently, the maximum interest rate offered on savings account still stands within the predetermined limit of 7% p.a. However, Nepal Bank Limited (NBL) and Nepal SBI Bank (SBI) offer the lowest interest rate on savings account of 2.25% to 4.25% p.a. Similarly, some banks have increased their offered FD rates while some banks have kept it unchanged. Century Commercial Bank (CCBL), Civil Bank (CBL), Kumari Bank Limited (KBL) and Mega Bank (MEGA) offer the highest interest rate on fixed deposit of 1 Year and above for individuals at 13% p.a. while Standard Chartered Bank (SCB) offers the lowest at 9% p.a.

Although, savings and fixed deposits for individuals may vary, fixed deposits for institution (1 Year period) is at a uniform rate of 9% p.a. for all the commercial banks. Whereas, fixed deposits for institutions for period of 10 years or more have negotiable rates. However, additional 0.5% interest is still under the discretion of the respective banks.

The agreement to set a limit on interest rates was made to regulate the competition amongst commercial banks and to create a perfect completion environment between commercial banks. It also had a benefit of choice to the customer. However, after the end of this agreement commercial bank sector may see emergence of market leaders and controllers. Commercial Banks’ competition to increase the interest rates will hamper the investment in the securities market as investors will be willing to move their investment from the market to the commercial banks on being offered required rate of return.