By Dipesh Ghimire
Impact and Strategies When Interest Rates on Savings and Term Deposits Decrease
With the start of the fiscal year 2081/82, all banks and financial institutions have reduced the interest rates on savings and term deposit accounts. Commercial banks have announced an average interest rate of 3% on regular savings accounts and 6% on term deposit accounts.
According to recent data published by Nepal Rastra Bank, consumer inflation is averaging at 5%. This means that something which cost NPR 100 yesterday now costs NPR 105.
In this situation, a 3% interest on savings cannot keep up with inflation. Such a move by the banks discourages savers. Observing the decisions made by banks to reduce interest rates over the past 5-6 months, there is a possibility that interest rates may drop even further.
Possible Impacts
Change in Saver Sentiment: As interest rates decrease, savers may be inclined to invest in illegal sectors instead of keeping deposits in banks, which can lead to liquidity problems.
Cost-Reduction Efforts by Banks: Banks have reduced savings interest rates to cut costs, which lowers the base rate and also reduces loan interest rates. However, there is no demand for loans in the market.
Business Disappointment: Even with interest rates in single digits, neither old businesses are happy, nor are new entrepreneurs excited. Products are not finding a market, and it is becoming difficult to cover operational costs with sales profits.
Possible Strategies
Long-Term Strategies: The government and the central bank need to formulate long-term strategies to sustain existing businesses and attract new entrepreneurs.
Formulation of Monetary Policy: The upcoming monetary policy should be encouraging and address the problems of all businesses.
Flexible Bank Policies: To bring stability in declining interest rates and improve the business environment, flexible policies need to be adopted.
Economic Improvements: Recently, there have been some positive signs in the economy. The improvements seen in the stock market after the change of government indicate the possibility of an increase in loan demand in the market.
Conclusion
To bring stability in the reduced interest rates and improve the business environment, it is essential to focus on the formulation of monetary policies. This will help sustain existing businesses and increase the potential for new entrants.
