What is the minimum and maximum interest rate charged by commercial banks on margin type loan? Look at the base rate and net interest spread of all commercial banks

~Rishab Agrawal

Base rate, as defined by Nepal Rastra Bank, includes all cost of funds, cost of liquidity (CRR and SLR), and cost of operation. If a bank’s returns on government securities is lower than deposit collection rate, they can add the shortfall in the base rate.

This is the minimum rate banks have to charge their customers. Banks usually add a premium to the base rate to derive the total rate of interest on a particular type of loan facility. This makes the loan facility provided by different banks vary in the interest rate charged.

Net Interest Spread, also known as spread rate, is the difference between the borrowing and lending rate of financial institutions. It is expressed as interest rate on yielding assets minus interest rate paid on deposits. The spread rate is a reflection of the difference between what the banks are charging and paying as interest.  

Commercial Banks are required to publish their base rate and spread rate for every quarter. The list of latest base rate, interest on margin lending (or loan against shares) and interest spread of each commercial banks is as follows:

Currently, Kumari Bank (KBL) has the highest base rate among commercial banks at 11.55% followed by Century Commercial Bank (CCBL) having base rate of 11.50%. Two other banks, namely Janata Bank (JBNL) and Civil Bank (CBL) have base rate above 11%. On the other hand, government owned banks, Nepal Bank Limited (NBL) and Rastriya Banijya Bank (RBB) have the lowest base rate at 6.90% and 6.33% respectively. No other commercial bank has base rate less than 7%. The average base rate stands at 9.88% and 17 out of 28 commercial banks have above average base rate.

As mentioned earlier, the banks add a premium to the base rate to derive the interest on loan which differs from bank to bank. In case of margin lending, the range of premium added by each bank has been mentioned and accordingly the minimum rate and maximum rate of lending for this type of loan has been derived. The minimum lending rate averages at 10.98% while the maximum lending rate averages at 15.88%. The rate of premium for this type of loan can be anywhere between 0% and 8%. However, NMB Bank (NMB) has set the upper limit to 10% depending on the amount of loan and the nature of the debtor.

Looking at the interest spread rate, NIC Asia Bank (NICA) has the highest spread rate in the industry at 4.98% followed by Rastriya Banijya Bank (RBB) at 4.95% while Kumari Bank Limited (KBL) and Civil Bank Limited (CBL) have the lowest at 3.38% and 3.23% respectively. The average interest spread rate stands at 4.16% with 12 commercial banks having above average interest spread rate.

NRB had allowed the banks to add up to 0.75% to the base rate as return on asset. Recently, this provision was abolished by the central bank hoping that the commercial banks would curb their lending rates. But the commercial banks failed to do so.