Base Rate Trends: Banking Sector Competition and Margins

The base rate, which represents the minimum interest rate below which commercial banks cannot lend, is a critical benchmark for credit pricing and banking sector competition. In Nepal, base rates have seen wide fluctuations in recent years, shaped by liquidity cycles, remittance inflows, and monetary policy. After climbing to 9.54% in FY 2021/22 and further to 10.03% in FY 2022/23 during a period of tight liquidity and high inflation, the base rate dropped to 8.00% in FY 2023/24 and fell sharply to 6.02% in FY 2024/25. By mid-August 2082/83 (2025/26), the base rate had moderated further to 5.78%, marking the lowest level in years.

This steady decline in base rates is reshaping Nepal’s banking competition and margins. On one hand, lower base rates make credit more affordable for borrowers, intensifying competition among banks to attract clients with attractive lending products. Sectors such as hydropower, construction, SMEs, and consumer credit stand to benefit from cheaper financing options. On the other hand, lower base rates also compress banks’ profit margins, particularly when deposit rates remain above 4%. The narrowing spread between lending and deposit rates (which peaked at over 4% in FY 2022/23 but has since narrowed significantly) puts pressure on banks’ profitability.

At the systemic level, declining base rates reflect ample liquidity supported by remittance inflows, a current account surplus, and record-high foreign exchange reserves. With inflation cooling to just 1.68% in mid-August 2082/83, banks are under less pressure to maintain high lending benchmarks. However, the challenge is that even with lower base rates, private sector credit growth remains modest (7.7% in mid-August 2082/83), showing that demand-side constraints and business caution continue to weigh on loan expansion.

Looking forward, base rate dynamics will play a key role in determining the balance between competitiveness and stability in Nepal’s banking sector. If rates stay low, borrowers will benefit and investment may pick up, but banks will need to innovate—by cutting costs, diversifying services, or expanding fee-based income—to protect margins. Policymakers must also ensure that aggressive competition does not lead to risky lending practices or asset quality deterioration.