1.1 Background After successfully holding the Constituent Assembly (CA) election on 10th April 2008, new coalition government has formed and the nation has entered into the new phase of the political development. Two hundreds and forty years long monarchy has been already abolished. The government has been mandated to draft the new constitution within two and half years and to start the reforming process of the nation on the federal basis to ensure the economic, cultural, religious and lingual rights for the people of all caste and creed. It is the high time for all political parties, government, business community, public and other concerned groups to sit side to side to make common economic programs despite of their political differences and interests to lift up the nation from the tag of the one of the least developed nation in the world. We have witnessed the bitter experiences of wasting all our time in the political issues in the past and the economic issues remained totally neglected. Let us hope, in the future, the economic issues would top the political issues. The clear symptoms of ending of the decade long insurgency has been also realized in the economic performance and the nation has experienced an encouraging economic growth of over five percent for the fiscal year 2007/08 which is the highest growth rate of last seven years despite of the numbers of problematic factors like fuel shortage, several hours load shedding, labor related problems and frequently called strikes. In the fiscal year 2063/64, the GDP on the current price was Rs.768832 millions with 13.8% higher than the previous year. Similarly, the GDP for the fiscal year 2065/66 under current price is projected to be Rs.820810 millions with projected growth of 12.9%. On the base price, the per capita income is projected to reach Rs.20816 with the projected growth rate of 2.59% than previous year. In the last fiscal year 2064/65; the total revenue collection has gone up with around 22%. However,
the trade deficit is swelling year to year and crossed the mark of Rs.130 billions and India alone with have more than Rs.105 billions. However, the foreign exchange reserve has been over Rs.180 Billions due to the encouraging growth on remittances. Let us hope, the new government would pay its high attention to establish appropriate environment for economic activities. The banking sector is considered as one of the major guiding sector for the rapid economic growth of Nepal. However, this sector is still confined to limited areas and only limited people have the access of the modern banking services. Though, the strong arrival of the private sector in this field has widened the horizon of the banking services. Now 25 commercial banks (AClass), 59 development banks (B-Class) and 79 finance companies(C-Class) licensed financial institutions by NRB are under operation in various parts of the country according to Economic Survey 2006/2007. Moreover, rural development banks and financial co-operatives are also delivering various financial services to the people. However, major chunk of the rural economy is yet to be integrated in the mainstream of the development to attain the broad, rapid and sustainable growth of the economy. Still the large population of the country is dependent on the traditional money lenders to get credit and paying more than 20% interest rate. Sometimes, it uses to be over 36% also. According to Nepal Economic Survey 2006/07, total branches of commercial banks have reached to 591 till last of March 2008. In the recent days, commercial banks are competing to each other to establish more branches across the various parts of the country. Now, per branch population is 45700 and per person deposits is Rs.14460. Total deposit collection of the commercial banks has reached to Rs.390420 millions. While talking about the overall economic development, both monetary and fiscal policies have been evolved as the two wheels of the economy in the
recent decades. The nation should simultaneously utilize these instruments to accelerate the economic development with in the monetary policy; interest is the most essential topic which plays vital role in the deposit mobilization, lending and investment in the economy. Across the world, the central bank is the authorized body to formulate the monetary policy and implement this. In Nepal, NRB is the central bank authorized to formulate and implement the monetary policy. Banks are granted autonomy to fix the interest rate since 1990 adopting the liberal economic policy. However, NRB can use some monetary instruments guide the interest rate on the reasonable level according to the prevailing economic situation. While especially talking about the banking sector, Nepal Bank Limited established in 1938 A.D. is the first bank of Nepal. NRB, central bank of Nepal, was established in 1956 under the Nepal Rastra Bank Act 1955. Since its establishment, it is playing vital role, to regulate the financial market and to expand the financial services in the economy since long. However, it has to carry out some major responsibilities like expanding the banking services more comprehensively than before and regulate the financial market to maintain the financial discipline. Formulating the appropriate monetary policy, NRB can play an instrumental role to accelerate the economic development and to create the suitable environment for more equitable distribution of wealth. 1.2. Statement of the Problem Despite of the continuous efforts from the government, NRB, and financial institutions themselves, our financial system is still suffering from various kinds of drawbacks. Technological progress is still far behind in the financial institutions in the comparison of other developed and developing nations, the spreading on interest rates is still alarmingly on high level, mismanagement and problem of defaulting on the loan is quite serious. As we have already mentioned, our financial system is yet to reach the major portion of the rural people and the policies are not pro-poor.
Table 1.1 Deposit and Lending Rates Saving Deposit One Year Deposit Source: Two Year And Above deposit Agriculture Lending Industrial Lending Commercial Lending Overdraft http://www.nrb.org.np/show… (28th April, 2008) 2-6.5% 2.5-5.75% 2.75-6.75 9.5-12% 7-13% 8-13.5% 6.5-13.5%
The table 1.1 is very clear indication of the high spreading between lending and deposits even in our organized financial market which is one of most striking problem, our economy is facing currently. 1.3 Objectives of the Study This research has the general objective of analyzing the overall interest rate regime of the organized market of the Nepalese economy. However, the specific objectives are as followings:
To analyze the structure of spread rate in organized financial institutions.
• To examine implications of high spread rate in lending and borrowing practices. • To examine the position of outstanding credit in the contemporary interest rate regime. • To examine the various factors determining spread rate.
1.4 Significance of the Study This is very relevant topic in the context that our nation is heading towards vital political and economic transformation. Moreover, our economy is still suffering from the lack of sufficient capital and investment and the financial sector is
We have used the data of the commercial banks alone to analyze the whole financial market since they cover the major portion of the organized market.under the process of vital reforms. future researchers also can use the conclusions and recommendations of this research work as references. real position of spreading gap on interest and the impact of the interest rate on the deposit collection and lending.
.5 Hypothesis of the Study
The main purpose of conducting this research is to know the contemporary interest rate position in our organized market. However. our economy is still a dual economy and the position of unorganized market is not incorporated in this research work. However. Therefore. The deposit collection and lending phenomenon has the close association with the spread rate. the there are other numbers of factors playing with the circumstances of the deposit collection and lending process which are neglected here. 2. Therefore it could have serious policy implications in case of the successful completion of good research work. it may not depict the real situation of the interest rate regime before 1998. here only the data of the last ten years is used to do the study. The spread rate is still operating on alarmingly high level. 1. we should not forget that financial institutions other than the commercial banks also occupy significant volume of financial sector. Finally. Here. we would only study the impact of interest rates on deposit mobilization and lending. the real competitive environment in the interest rate regime is yet to be realized. Despite of the rising numbers of financial institutions. here we have only employed the time series data and the cross section data is completely neglected. 3. Therefore the research work would try to test the following impacts: 1.
1. Moreover. Similarly.6 Limitations of the Study This research work is basically an attempt to identify the relations between the interest rate with deposit mobilization and lending phenomenon. Moreover.
7 Organization of the Study Chapter 1 is the introduction chapter which is the main framework and the basis of the study.
REVIEW OF LITERATURE
. And it also incorporates the data relevant to this research work. Chapter 2 provides the relevant literatures for the proposed study. Appendices and Bibliography of the study are presented at the end of this document.1. Chapter 5 is Summery. analytical presentation of them both in quantitative and qualitative form. money supply position and other contemporary issues in the Nepalese context. Chapter 3 briefly introduces the methodology adopted in this research work. It is also the main part of the study in which we have presented the empirical data and have been analyzed this according to our objectives and methodology of the study. Conclusions and Recommendations of the study. Chapter 4 offers the theoretical background regarding the interest rate.
• It regulates the flow of funds in the direction of investment and thereby influences the growth of business and industrial activity. theoretical and empirical findings are reviewed below.
. etc.1 Theoretical Review 2. Moreover Paul in his book has incorporated the different definitions of various economists regarding to the interest rate in his book.This research work is concerned about the interest rate position. According to Paul. • It has been widely recognized as a powerful weapon to be used by the monetary authorities to control inflation. Paul in his book has incorporated the views of various economists about interest. Regarding the subject matters.1.1 International Context Rate of interest occupies an important place not only in the economic literature but also in the practical economic activities. The rate of interest is also of great practical significance particularly in the modern economy. capital movement. • It measures the opportunity cost of various productive channels and thus helps allocation of saving them. Theoretically. the nature of interest has been discussed in the writings of almost all the major economic thinkers beginning from Adam Smith till this date. 2. spread rate and its impact on deposit mobilization and total outstanding credit. the later economists give high priority on the interest rate which now has been evolved as one of the most instrumental toll to guide the economy and it falls under the monetary policy and the Central Bank is authorized to formulate the appropriate interest rate policy. Paul in his book has given the following implications of interest rate: • It induces the people to save their incomes and provides the capital for the productive purposes. Paul interprets the interest as Interest is the payment made by a borrower to the lender for the use of money and is expressed as a rate percent per year. deflation.
Marshall defines the interest as “The price paid for the use of capital in any market”. Similarly, T.N. Carver defines interest as “The income which goes to the owner of the capital”. However, J.M. Keynes regards the interest as monetary phenomenon and defines it as the “Premium which has to be offered to induce people to hold their wealth in some other than hoarded money”. Theoretical Discussions on the Interest Since long economists have failed to reach on consensus with common theory on interest. Various theories are under practices on interest rate. To explain the nature and determining factors of interest very is complicated phenomenon. Therefore different theories come in practices for and against of each others. Different writers and economists in their books have explained major theories in this fashion. I. Classical Theory of Interest According to the classical economists such as Ricardo, Marshall, Pigou, etc, interest is a real concept i.e. a reward for their use of the capital and rate of interest is determined by the interaction of demand for and supply of capital. II. Neo- Classical Loanable Funds theory of Interest The Neo-Classical economists developed the loanable funds theory of interest which is an improved version of the classical theory of interest. According to the neo-classical theory, interest is the reward for the use of the loanable funds and the rate of interest is determined by the demand and the supply of the loanable funds. Unlike the classical theory, which deals only with the real factors of saving and the investment, the loanable funds theory includes both real as well as monetary factors influencing the loanable funds and thus the rate of interest. Swedish economist K. Wicksell developed this theory and other economists like Myrdal, Lindhal, Ohlin and Robertson redefined the theory. III Keynes’ Liquidity Preference Theory of Interest
Paul, in his book, has incorporated the Keynes’ Liquidity Preference Theory of Interest developed a theory of interest which theory came as opposed to the classical real theory of interest. It is referred to as monetary theory because of the following reasons: (A) According to Keynes, interest, which is a payment for the use of money, is a monetary phenomenon. (B) Rate of interest is calculated in terms of money. (C) In this theory, the rate of interest is determined by demand and supply of money (D) According to this theory, the rate of interest can be controlled by the monetary authority. Keynes’ theory of interest is known as the liquidity preference theory of interest. Interest has been defined as the reward for parting with liquidity for a specific period. Money is the most liquid asset and people generally have liquidity preference i.e. preference on holding the wealth on cash (Paul,2005). IV. Modern Theory of Interest No single theory of interest is complete and determinate. The loananble funds theory and liquidity preference theory, taken separately, are indeterminate, but taken together; they do provide a determinate theory of interest. Economists like Hicks, Hansen and Learner have formulated a determinant theory of interest by integrating the neoclassical loanable funds theory and liquidity preference theory. This is referred as the neo-Keynesian synthesis or modern theory of interest. Jhingan has also incorporated different views about interest rate in his book and he himself has given the critical appraisal. According to Jhingan, Kunt Wicksell are the pioneer economists to discuss about the natural interest rate and the market interest rate. Wicksell uses such phrases as ‘ordinary rate’, ‘normal rate’ and the ‘real rate’ as synonyms for the natural rate. He defined this in these words: “The rate of interest at which the demand for loan capital and the supply of savings exactly agree and which more or less corresponds to the expected yield of on the newly created capital will then be the normal or
natural real rate”. It is the rate consistent with stable money supply and prices. On the other hand, the market rate, the market rate of interest is the money rate prevailing in the loan market. It is the rate of interest charged by the banks or the lenders. It depends upon the demand and supply of money. Wicklsell integrated interest theory, quantity theory, aggregate demand and aggregate supply, and the functioning of a modern banking system. He thus anticipated some of the current notions in monetary theory. Wicksell also stressed three conditions in this theory; first the equality between the natural (equilibrium) rate and the market (bank) rate. Second, the equality of ex ante saving and investment. Third, a constant price level. These identical conditions have come to be known as, “Monetary Equilibrium” monetary analysis. It was Wicksell, who attributed changes in the price level to discrepancies between aggregate demand and aggregate supply on the basis of relationship between saving ad investment. It was again Wicksell who stressed the importance of the rate of interest in monetary theory. Wicksell integrated the monetary theory and non-monetary theories of interest by emphasizing the equilibrium of natural interest rate and market interest rate. He thus paved the way for a determinate theory of interest, as developed by Hicks and Hansen, which is regarded as the modern theory of interest. Again, Wicksell’s cumulative process has come to be known as the Wicksell Effect. It emphasizes the importance of bank-credit creation on the rate of interest. Mrs. Robinson regards the Wicksell Effect as “the key to the whole theory of capital accumulation”. Moreover, Wicksell was a quantity theorist who wanted to “to arrive at a theory which should be both self-consistent and with full agreement with facts”. His analysis of the link between the banking system and short-run inflations during the cumulative process to be found in the hyper-inflation case studies in Friedman’s studies in the quantity theory of money similarly, the surpassed inflation that followed the post-war years 1945-
51 due to the policies adopted by monetary authorities in the USA may also attributed to the Wicksellian cumulative process. Thus Wicksell was the forerunner of the modern monetary theorists. Fisher, the real or natural rate of interest refers to the percentage rate paid on borrowed money after making and adjustment for changes in the price level. On the other hand, the market or money rate of interest is the percentage rate paid on borrowed money. If a person borrows Rs 10,000 from a bank at 6 percent, it is the money rate of interest. He will have to return Rs 10,600 to the bank next year. If the price index rises by 1.02, the real rate of interest is reduced. In order to find the real rate of interest, the sum repaid to bank is deflated by the price index, i.e. 10,600/1.02=Rs. 10,392. It implies the bank earns 3.92 percent of real interest against the money rate of six percent per annum (Jhingan,1994). . Fry, in his book, discusses about the interest rate policy in Nepal. Taking time series data, covering the period of 1957-1976, his purposes were to analyze the effects of interest rate, to recommend the measures for interest rate policy and to give suggestions for accelerating the rate of domestic resource mobilization in Nepal. The suggestions given by him are as follows: 1. Suggestions for Rational Interest Rate a. Abolishing all existing time deposits. b. Introduce new one year time deposits with release to banks at 1% discount yielding 13% interest rate. c. Make all interest earned on deposits free from the tax (at least the first Rs.5000) 2. Suggestions for Rational Loan rates a. Allow financial institutions to make additional changes to cover differing costs and risk premium on all types of loans. b. Maintain present commercial loan rate but enact negotiable instrument act and legislation for effective hypothecation immediately.
Abolish the liquidity ratio but maintain cash reserve ratio (CRR). g.1. i. NRB is playing direct and indirect role to guide the interest rate in the desirable level (Regmi. Reduce the registration fees it should cover costs only.d. time deposit reform. 2. If the interest rate is reduced. except those held as penalties. in his book writes that the monetary dualism is the main syndrome of Nepalese monetary system. And the financial and banking sector receive the interest in the return of credit they delivered to the production sectors. Pay interest rate on all banks deposits with NRB. 1977). That some non-institutional interest rates may be lower than the present commercial bank loan rates.2 National Context Regmi. he concluded that it is very doubtful whether any reduction on loan rate is warranted at present. the higher interest rate squeezes on the demand of the credit and increases the cost of goods and services. 2005). e. f. in his book has distinctly recognized the role of NRB to maintain the monetary and fiscal discipline in the financial sector. He opines that NRB should play the stimulus role in the overall economic development. Generally. It implies that there is coexistence of two monetary
. Gaudel. which are irrelevant (Fry. The capital required for the production is supplied by the banking and financial institutions. abolition of the liquidity ratio higher development bond rates. Increase the government borrowing interest rates. Unwanted capital inflow will be checked by the deposit rate reform. the banks’ profitability restored by paying interest rate on their deposits with NRB. it increases the demand of the credit and inflationary pressure is realized in the economy. Change loan rate on existing loan from their original level. Therefore the interest rate should be very appropriate and balanced. Central bank can manipulate the interest rate in the market applying various kinds of the monetary instruments. Finally.
traders.markets namely organized and unorganized in the same economy. In this context. Further. provide the bulk of credit requirements to the semi-urban areas. it follows the prescription of maintaining the positive loan and deposit rate as argued by real money theorist. and other financial institutions. As a result. are generally outside the control of NRB. Moreover. So the interest rate charged by them ha s always been exorbitant (24% to 60%) in comparison to organized market. Their activities though rapidly expanding in the recent years are confined to few urban centers only. it also gave an advice to
. Similarly the loan of the commercial banks showed an upward movement over the past several years from 1965 to 1990. therefore. development banks. In the unorganized sector. Nepal adopted a new approach of high but flexible interest rate policy in April 1975. there occurred a new thinking about the interest rate policy that the high interest rate on bank deposits is necessary to mobilize savings for economic development. Accordingly. The unorganized market consists largely of indigenous moneylenders. and dhukuti owners (savings co-operatives). The organized money market consists of commercial banks. since May 1986. There exist few creditors or indigenous moneylenders in relation to a large numbers of borrowers. many changes have been taken place on the deposit rate structure of commercial banks from1966 onwards. Since then. the NRB decided to deregulate the interest rate policy in the context of financial liberalization. Particularly. The participants of unorganized money market. landlords. the interest rate on savings and fixed deposits was found reduced since 1994. above table shows the adjustment made by the monetary towards higher rate of interest on savings and fixed amount of commercial banks offered an inducement to save more in bank deposits. This type of dualism also prevails in the interest rate structure of the Nepalese economy. interest rate is determined by the monopoly market condition. it was stated that the interest rates in organized money market were administered and regulated not only on deposits and loans of commercial banks but also on the securities issued by the government until 1989. From the year 1996.
there is a little scope to generalize on the basis of ISD’s (Institute for Sustainable Development) conclusion. the trend did not give any consistent pattern to analyze the impact of interest rates in the economy. it may be inferred that the long trend of interest rate in Nepal does not reflect the opportunity cost of holding money for speculative purposes. the policy of independent interest rate too did not materialize. European Union and China as well as the median economies like Korea. Japan. the powerhouses of world economy like USA. Laymen Brothers. 2003). From this analysis. the economic crisis may further get deeper. While considering the real interest rate from 1965 to 1999. Then the world economy catches the down-turn with fear of recession and the capital market is
. Consequently. Low interest rate policy seems to encourage unproductive expenditure and to discourage savings mobilization (Gaudel.1 International Context In the context. the spill over effects of the housing sector grips the whole US economy. Although. the erratic movement in the real interest rate has caused capital outflow and deficit balance of trade in the country. Fear is still looming across the world. the global economy is reeling under the severe financial crisis.2. The present world economic crisis basically emerged from the problem of sub-prime mortgage over housing sector. 2. USA alone has introduced the stimulus package of $700 Billions bailout package to protect the giant financial institutions like American International Group. Now the US government is still mulling over the rescue package for the auto companies as well. India and Brazil are introducing the stimulus package to revive the world economy as soon as possible. However. Washington Mutual and Morgan Stanley.2 Empirical Review 2.commercial banks to reduce the existing gap between deposits and lending rates assigned by them to stimulate the investment.
US economy is the hard-hit economy and Federal Reserve is struggling to find the solution.25%. Federal Reserve has cut down the interest rates several times this year. Now it has been heading to almost to zero level. 2008 which reduced the interest rate to 0.heavily tumbled. the interest rate has very wide implication in the economy. It has cut the interest rate four times with in a year and its latest decision came on December 16. The Federal Reserve Bank has expected. The market very positively responded the decision of Federal Reserve and surges by 4. Some Empirical Events Surrounding the Interest Rates in the Global Economy Obviously.1%. this would increase the availability of the credit in the market. the interest rate is not the sole factor to guide the national and world economy. It is the least level in the US history and the central bank has already hinted that it has done everything to stimulate the economy and it could not do more than this. increases the consumption and revive the economy at last. To stimulate the US economy. Bank of Japan and European Central Bank are also on the same line to cut down the interest rate to stimulate their economy. almost fifty percent in the beginning of December 2008 than in the comparison of 2007. Here the remarkable comment by US Federal Reserve Bank is that it could not do more than this when the interest rate has been already cut down to almost zero level. World Bank and International Monetary Fund are also introducing their own rescue plan to stimulate the global economy.
. However. As we mentioned above. Besides these.
Japan is the leading Asian economy. In Asia. 2008). Secondly. the policy makers. the decisions made by the different central banks to cut down the interest are not criticism free. of the coin. his article writes. the Swiss. it is the compensation for the service and the lending of the money. The interest rate has been cut three times within 2008 and now it is 1.bbcworld. to stimulate the economy by increasing credit availability for the consumers. a borrower or both. as soon the problem of recession is overcome. The critics have the opinion that this move only increases the printed money and increases the inflation. French and English are now cutting the interest rates near following the US move. the common consensus among the experts is that interest rate level has serious implication in the economy but it is not the sole factor to guide the economy. Moreover. Swedish. Moreover.com/economy.
. December 17. interest rate is the cost of borrowing money or on the other side. However. Without it people were unwilling to lend or even save their cash. However. inflationary pressure would reel the economy (www. If you are lender. Heakel. It means. both of which require the determinant of the opportunity to give up the spending in the present.5%. But prevailing interest rate are always changing and different types of loan offer various interest rates. The objective is obvious. the economy is looming over the threat of depression where the economy has been already facing the recession. he has concluded that interest rate is primarily determined by the intersection of the demand for and supply of credit along with other surrounding factors. it is important for you to understand the reasons for these changes and differences. analysts and leading financial institutions are employing the interest rate as the instrumental tool to guide the economy on the desirable path.The European Central Bank is also cutting the interest rate and has now reduced to 2%. However.
5% interest on saving account. Other five banks are giving up to 3. The liberalized policy has reduced both the lending and deposit rate.2 National Context Articles Shrestha. This is the outcome of the liberal economic policy and it is still operating.5% in the fixed account according to time period.5% and the lending rate was 15%21%. and of the amount you will have to pay to borrow money. they are granted autonomy to fix the interest rate both on the lending and deposits. of bonding price. this increases the level of production and the employment. Now the minimum rate on the lending is 6. Here the big bankers are providing very low level of interest rate. this has also significantly reduces the deposit rates. they are collecting higher portion of then deposits. has briefly discussed about the interest rate regime of Nepal.5% in the saving account and other are banks giving up to 4. it is important you can understand how its characteristics determine what kind of rate you can receive(Hakel. when you are deciding on investing on debt security.He concludes. the deposit rate was around 9. After 1990. The banks and financial institutions give the interest on deposits and take the interest on the lending. 2008). However.147 billion while their deposit rate is just 2 to 2. 2. big eight banks have the deposit of Rs. you can earn by lending money. as interest rates are major factor of the income. Here he has discussed about the contemporary interest rate regime of the economy focusing the organized market. it is important for you to understand how prevailing interest rates change. For example. Simultaneously. primarily by the forces of demand and supply which are also affected by inflation and monetary policies. However. Of course.5% on saving account. It means the deposit rate is by
.5% and the maximum rate is around 13% according to the sectors.2. For example the minimum rate of saving account is 2% and 2% to 6. It is the 73% of total deposit of saving account. During 1990s. It is a positive move in one sense because the reduced rate in the interest also reduced the cost of investment.
Moreover. In case of the lending also. The lending rate position is also different in different banks. It means the depositors are depositing their money in two percent interest instead buying the bond having seven percent of interest rate. Therefore the depositors are getting very minimal level of interest on their deposits. However. Now there is no problem of choice like two decades ago since around one hundred of financial institutions are doing the business of landings and deposits. Here the costumers can choose the appropriate one.75% of interest rate. if the market rate rises. it is not as in the case deposits.itself very a low and the big volume of deposits are in the bigger banks having very low interest rate. They should formulate two types of policy. The first one is fixed for all time indifferent to the changing market rates. However. another crucial point is that the banks and financial institutions are altering the interest rate on the lending even after the agreement. it was not sold completely. they automatically raise the interest rate on lending but never reduce the interest rate when the market rate falls. Banks are collecting the service charge beside interest rate on lending rate. the outcome is not according the sprit of competitive market. In the competitive economy. For example. a borrower borrows the money on seven percent of interest rate for five years. Here is very crucial example. the costumers should not pay different cost for same good. the financial institutions are making the costumers worried. Here the out looking seems competitive. However. On the way. The government sold the four years bond having 7. The second one is floated which can be changed according to the changing market scenario. This phenomenon does not force the banks to increase the deposit rate.
. Big contrary of our banking and financial market is that costumers are queuing on those institutions having lower deposit rate leaving other having higher deposit rate.
Here the depositors are worried for low level of interest rate and the lending has failed to go on the productive sector. After the establishment of central bank. our monetary market has witnessed numbers of upheavals and NRB has initiated number of policy changes. It happens either due to the lack of sufficient information about banking system to the costumers or the public have no access to NRB information or NRB information is not properly utilized by the public. he has given the brief overview of the history of interest rate phenomenon in the organized sector in Nepal after the establishment of NRB in 1956 A. the costumers are choosing the easily accessible institutions. financial institutions are flourishing rapidly despite of the significantly dismissal economic performance. The evolution of interest rate regime from completely administered one to one of full liberalization has been via gradual process. In this context. (Shrestha. It was made use of achieving a numbers of objectives ranging from: achieving the stability in Balance Of payment (BOP). in his article discusses the interest rate structure in Nepal which was published in Golden Jubilee Magazine of NRB. 2008) Thapa. “Almost fifty years ago. Nepal had a tightly administered interest rate regime. with the interest rate policy having been the most intensively used monetary policy instrument in Nepal. He writes. Presently the domestic interest rate regime has been completely liberalized.D. the public have low level of knowledge about the banking and financial system and they could not calculate the differences between the loss and benefits while depositing their money.
. the costumers themselves should be very rational and the banking and financial institutions and media should deliver the appropriate information to the public. under the Nepal Rastra Bank Act 1955 A. accelerating resources mobilization: combating inflation. In his article. Due to these various reasons. Moreover. Probably another point is the costumers or the public is risk averters who are ready to deposit their money even in the low level of deposit rate where the risk is felt low.D.The existing interest rate policy of banks and the financial institutions is affecting both the depositors and the creditors simultaneously.
He has highlighted the importance interest rate structure which can directly and indirectly affects almost all sector of the economy (Thapa. Sharma. or the productivity growth is affected by so many other risk and uncertainty actors with their domestic as well as foreign origin and when the profit or the productivity rate is not explained by the capital alone. height. He has also divided the monetary market of Nepal into two parts: organized and unorganized sector. or the efficiency of the fund invested in each sector. from this point of view. it is quite difficult to reach a definite conclusion on the built-in economic nature and the structure of the natural rate and the effect of it on investment decision.1993). But since the profit rate. from outside the economy and of the long run and of the generated through the research exercises. “The size of the influence on the rate. in his MA Dissertation has tried to analyze the interest rate regime of Nepal in the context of money supply. behavior and the co-existence to the rates are quite enough in indicating the stages of the economic development popularly known as backward and advanced ones. obviously belongs to the former category” (Sharma. Dissertations Paudel. in his article discusses about interest rates of Nepal as. the credit suppliers are indigenous bankers and traditional money lenders. rate of interest should indicate the profit. in a market regulated economy as of today. The unorganized credit is prevailing in the rural areas of Nepal where about 88% of total population live. The traditional money lenders try to
. Nepal. He further emphasizes. Nepal’s economic performance measured in terms of the of the sectoral ICOR’s should not be that disappointing.deploying the resources to the preferred sectors of the economy to enhancing the competition inn the financial sector and increasing efficiency in the resource allocation”. 2005). In the unorganized sector. Still we may conclude that the structure. on the other hand.
it is found to be about 5-6% in maximum but in Nepal it exceeds that limit also. the interest spread seems to be within the limit of 1-2% while in the developing countries. In the developed countries. Interest on Government securities 2. For this he has suggested the commercial banks for organizational reforms. commercial banks and other financial institutions fall in this category. Followings types of interest rates are found in the organized market of Nepal: 1. In his dissertation he has pointed out the high level of spread rate even in the organized market of Nepal.
. The interest rate is very low in the organized market in comparison to unorganized market. A study of NRB has revealed that only 20% population has the access of credit facility in the unorganized market. Interest of Financial Institutions The interest given on deposits and the interest charged on loans both are collectively known as interest rate. The high interest rate given on deposits attracts the customers for more and more saving and deposits in the banks while the low lending rate decreases the cost of capital promoting investment. Obviously. it may be over 50% sometimes. The interest spread is defined as the difference between the lending rate and deposit rate. Interest of Nepal Rastra Bank 3. Therefore the good banking system is that which balances between the deposits and loan rate properly.keep the peasants and poor people permanently in dept. increase the noncash reserve transactions and the depositors and the creditors should be treated transparently to reduce the spread between interest rate on loans and deposits. central banks (NRB in case of Nepal). maximum utilization of resources. The interest rates in unorganized market commonly range from 24% to 36%. at present situation also. the traditional money lenders are in existence in very parts of the country. Interest of commercial Banks 4. However.
The commercial banks should stop cartelling in interest rate determination and fair competition should be maintained between them. For
. Due to this reason real people are not getting enough credit facility. has made a theoretical attempt and has not presented any mathematical terms in his study. During the review period. quarterly and monthly basis. monetary situation and overall economic situation.A. They are published in annually. Bastola tried to analyze how monetary measures can provide additional capital for financial development through the change in money supply and intuitional interest rates in his M. Money supply is a factor providing additional capital by expanding banking facility in rural areas and to mobilize the resources of rural areas into productive sectors. institutional interest should be higher (Bastola 2003). on the other hand. They are basically focused on macroeconomic situation of economy. So. mid-terms interest rates have been increased. on the other hand. Journals NRB is publishing various bulletins. banks are providing facility. halfyearly. commercial banks are providing credit facility. Covering the data of the period 19922002. commercial. 2001). In the opinion of Bastola. He is of the view that the problem of lack of capital can be solved when the available capital diverts into the real productive sectors. The volume of money supply should be increased by increasing demand deposits and net currency from banking sector. It has briefly acknowledged the overall monetary situation of the economy. They are the chief sources of the data. dissertation. commercial banks are providing credit facility on trade and commerce which has hit the traditional sector. periodicals and magazines. the institutional rate of interest has seemed to be cheaper in our country that had created imbalances between demand and supply of credit. journals. To give the logical and precise conclusion. he has employed both qualitative and quantitative techniques (Paudel. on the other hand. that to mobilize the resources and to divert them into productive work.
The optimum rate of industrial loan during the period July to December of 2007 remains 13%. Commercial banks are delivering the credit mostly at the 6. Commercial Banks had reduced the interest rate on loans marginally.5% interest rate. Minimum and maximum interest rates on fixed deposit in 2007 July and 2007 December is 2. Similarly.86% from 2007 July to 2007 December. This problem may invite the problem of liquidity crunch in the future. Theoretically. The liquidity crunch created by the low interest rate could not be solved in the long term without adjusting the market interest rate structure.77% to 3. Symbol of this type of problem is appeared from the mid-term interest rate. The stagnant rate on deposit and increasing rate on loan would create the imbalance between demands for and supply of financial tools. It means. For example. least deposit rate given by the banks is 2% while the highest rate on deposit is 5% in July 2007 and it is unchanged for December 2007. Obviously. loose interest rate policy is adopted. higher the interest rate means lower the availability and viceversa. For example.
.example. Similarly. However. However. the interest rate use to be raised.25% and 5% respectively. commercial banks have reduced the interest rate on industrial loan from 8% to 7% during the July 2007 to December 2007. there is no change in the deposit rate given by the banks. mid-term interest rates like treasury bills rate and inter-banking rate have increased. to control the overflow of credit in the market. the interest rate is reduced. the economy has not reached in that condition. minimum export bill rate has reduced from 5% to 4% during the period of July 2007 to December 2007 and maximum is stagnant to 13% during evaluation period. the average interest rate for ninety one days treasury bills has increased from 2. When the market feels the necessity of credits.
2. in this field.3 Research Gap Most of the research works I have found.
. Here I have precisely focused my dissertation on the spread rate position of the interest rate. are basically focused on the contemporary phenomenon of the interest rate position.
the real position of the spread rate in the interest rate regime is studied in the periphery of deposit collection and outstanding credit is studied. the analysis is done with the help of percentage. various kinds of deposits levels and outstanding credit are analyzed observing their increasing and decreasing situations. The data source. Fixed Deposits. 3. method of data calculation and processing. Qualitative as well as quantitative method of reasoning is used to analyze the data. ratio. Presentation of Actual Data on Percentage Various components of banking sector like Saving Deposits.
. Current deposits. Presentation of data on Range The upper and lower limit of the interest rate structures on deposits and outstanding credit are presented in the range form. and graph situation of data etc.2 Qualitative Method In this research work. 3. Outstanding Credit etc are presented in the percentage form. the range of the data etc are mentioned below in brief. both the qualitative and quantitative approaches are adopted to analyze the data.1Research Design In this research work. Based on the actual data. In this study.CHAPTER THREE
The methodology used in this research work is inductive method. The variables used in this study are specified and models are fitted. the qualitative method is used for the analysis of time series data. Situation Analysis of Actual Data The interest rates.
the empirical relationships are tested with the help of statistical and economic tools. The ordinary least square (OLS) method of estimation is used where it is suitable.3.
3. 3. enterprises and businesspersons who deposit their money in the banks but could not get any interest rate from the deposits. The regression analysis is used for analyzing the data. Interest Rate Bearing Deposits I Current Deposits (CD) Basically. The relationships are developed using many variables. In this study. The dependent variable is also known as regressed or explained variable. 2. A) Dependent variables The variable whose value is influenced by other variable is called dependent variable. The values of the variables are time series data. The Simple correlation coefficient is computed between the concerned variables and if it exist our attempt further proceeds. They are dependent variables and independent variables.3 Quantitative Method The quantitative method is used to know the impact of spread position of interest rates in organized market on the deposits collection and lending. Two types of variables are used in this research. The explanatory power of the explanatory variable is found out with the
help of the coefficient of determination (R2). current deposit is associated with the big firms.3.
. 4.1 Basic Concept The following statistical tools are used for processing and analyzing the data to get empirical results: 1. Followings are dependent variables used in this research work.
IV. 6 moths. I. 2 months. in the case of big volume. the banks use to give comparatively higher rate of interest for the depositors. 30 days. Outstanding Credit (OD) Outstanding is the total loan delivered by the whole banking system both in investment portfolio and in non-investment portfolio. 3 months. the depositors could not withdraw the money before the agreed time period.
. The independent variable is known as repressor or explanatory variable. the depositors are allowed to withdraw the money. III Saving Deposits (SD) Saving deposits is that sort of deposits where the commercial banks give certain interest rate to the depositors. one year and two years and above are under practice. the rate lowers than the time deposits. Narrow Money Supply (M1) Narrow money supply is the sum total amount of currency held by the public and demand deposits held at commercial banks. B. It is directly influenced by the total deposit level and interest rate on lending.II Fixed Deposits (TD) Time Deposit is basically associated with the common depositors. However. which influences the other variables. is called independent variable. However. In our context. In the time deposits. M1 is used as explanatory variable when it is used to know the impact of narrow money supply on different types of interest rates and to compare the effectiveness of the monetary policy with the fiscal policy on real income determination. Independent Variable The variable. time deposits of 15 days. Moreover. they should give prior information to the bank. However.
the degree of association between the series of observations of two or more variables. usually denoted by rxy is a numerical measure of linear relationship between them and it is defined as: N∑XY-∑X∑Y rxy= [N∑X2 – (∑X) 2 [N∑Y2.3 The Regression Analysis between the Variables The regression analysis is mathematical measure of the average relationship between two or more variables in terms of the original data. Broad Money Supply (M2) Broad Money supply is the total amount of currency held by the public. Further time deposit consists of saving deposits.(∑Y) 2]
If r =-1.2 The correlation Coefficient between the Variables The correlation is the statistical tool.3. there exists perfect negative correlation between the variables. fixed deposits and margin deposits with commercial banks. Demand Deposits held at the commercial banks and the Time Deposits of the commercial banks. which measures the amount of similarity.3. If r = 0. It is the estimation of unknown values of other variables. high degree of correlation exists and if it is nearer to zero. low degree of correlation exists. there exists no correlation between the variables.II. M2 is taken as the explanatory variable when it is used to know the impact of broad money supply on different types of interest. 3. If the correlation coefficient is near to unity.e. we use simple correlation coefficient. there exists perfect positive correlation between the variables. i. The correlation coefficient between two variables X and Y. 3. If r =+1. Simple linear regression involves a relationship between two variables but multiple regression analysis consist
. The degree of relationship existing between two variables is called simple correlation. In this study.
The coefficient of determination is calculated by using the following formula. If the value of the R2 is high.three or more variables. there are two types of variable. we can estimate the value of dependent variable when the value of independent variable is known. The linear regression equation between the variables X and Y can be written in the usual form of a straight-line equation as: Y= a+bX Where. it is computed with the help of sample data and represents the percentage of total variation of the dependent variable being explained by the changes on the independent variables. They are dependent variable and independent variable. the explanatory power of the model will be high and vive-versa.4 The Coefficient of Determination The coefficient of determination is a statistical number and denoted by R2. In regression analysis. All economic concepts. et =Yt-Ŷt
. R2 = 1-∑et2 ∑ (Yt-Y) 2 Where. These relationships are not exact but attempt to measure the degree of relation only. policy issues and forecasting problems consider the relationship between two or more economic variables. 3. Y = Dependent Variable X = Independent Variable a = Constant Term b = Elasticity Coefficient of X By using the principle of least square method.3. The coefficient of determination is calculated to test the explanatory power of the model.
ANALYSIS AND FINDINGS
In this part.e. Money supply at a particular point of movement of time is the stock of money held by the public. and demand deposits with the banks held by the public. i. and many other forms. Money may also be defined according to its physical properties such as coin. Over a period. currency checking deposits. Money supply means the amount of money in circulation in an economy. The average numbers of times a unit of money passing from
. It refers to the stock of money held by the public in the spendable form. paper. interest rate structure and their affecting factors are defined and discussed in the Nepalese context. and the commercial banks do not form money supply because they are not in actual circulation. money is anything generally acceptable as means of payment and it must have stable purchasing power in order to retain the public faith. a standard of deferred payments and means of paying of debt. the central bank. money supply becomes a flow concept. it is flow. It is some times defined in terms of the job it does. Robertson defines money as: anything which is widely accepted in payments for goods or in discharge of other kinds of business obligations is called money. The cash balances held by the central government. It includes the total currency notes. coins. money supply. It may be spent many times during a period. 4. Money serves as medium of exchange.1 Money Supply Difference economists have defined money supply differently. Crowther defines money as: anything that is generally acceptable as a means of exchange and at the same time acts as measure and store of value. a unit of account. it is a stock and over a period. Most suitable definition of money is one that focuses on the primary use to which money is put in modern economy. a store of value. Money supply is a stock as well as flow concept. At a point of time.
. I) Narrow Money Supply The narrow money supply consists of currency held by the public(C) and the demand deposits held at the commercial banks (DD). RM is said to be determined by the monetary authority.one hand to another during a given time period is called the velocity of circulation of money. such that: M=mRM According to this theory. The multiplier theory of money supply states that money supply (M) is composed of money multiplier (m) and Reserve Money (RM).1. there are mainly two determinants of money supply. Symbolically. if the value of the money multiplier is stable.1 Multiplier Theory of Money Supply The money multiplier is a major component of the money supply process. which are the stock of reserve money and money multiplier. It determines the stock of money supply from a given level of money or monetary base (also called the high power money). fixed deposits and margin deposits with commercial banks. Symbolically: M1= C+DD II) Broad Money Supply The broad money supply includes currency held by the public (C). the money supply can be controlled with the controlling of reserve money by the monetary authority of the country. TD includes saving deposits. Demand Deposits held at the commercial banks and the Time Deposits at the commercial banks (TD). M2= C+DD+TD = M1+ TD 4. Nepal uses two types of the definitions of money supply namely narrow money supply (M1) and broad money supply (M2).
Monetary authority could use to various tools monetary system to attain the desirable level of growth. m2= (CC/DD+DD/DD+ TD/DD)/ (CC/DD+R/DD+OD/DD) The equation can be written as: m2= (c+1+t)/(c+r+d) Further. we get m1= (CC/DD+ DD/DD)/ (CC/DD+R/DD+OD/DD) This equation can be written as: m1= (c+1)/ (c+r+d) Similarly. m1= M1/RM= (CC+DD)/ (CC+R+DD) Dividing the right side of the above equation by DD. The specification of money multiplier theory of money supply for M1 and M2 is as. c=currency to demand deposit ratio r= required reserve ratio to demand deposit ratio t= time deposit to the demand deposit ratio So the above equation can be written as: M1 = (1+c) RM (c+r+d) And M2 = (1+c+t) RM (c+r+d)
. M1=m1RM M2=m2 RM Where. inflation and the interest rate in the economy. m1 and m2 are the money multiplier for narrow and broad money supply respectively. m2= (c+1+t)/(c+r+d) Where. the narrow money supply can be expressed as: m1= (c+1)/(c+r+d) and.
2 Interest Rate Structure In this part. financial sectors should direct the investors in those sectors where the expected rate of return is higher than any other sector. Most of the developing countries in the world face the problem of scarcity of domestic capital in the comparison of the capital required achieving high and self-sustaining economic growth. Interest is also known as reward for the risk. we find the inverse relationship. Interest is payment made by the borrower to the lender for the use of capital. that the interest rate of the existing banks and financial institutions is the guidelines for the investors.4. Interest rate depends on economic activities and existing policies of the economy. the interest spread and the Nepal Rastra Bank and the interest rates are mentioned. Interest is expressed as a rate percent per year. Greater the risk involved in a loan. They can calculate the return by comprising with institutional interest rate for the fund. An appropriate interest rate can divert investment in proper and targeted direction. Interest rate plays the important role in the developing countries like Nepal where the demand of capital is increasing day by day. For sound financial development and to mobilize the available resources. which they have borrowed. higher will be the rate of interest and vive versa. The interest rate is an effective rationing device for the allocation of scarce resources between alternative investments.
. The amount of additional capital is needed at increasing level of income for economic development. between the interest rate and investment and direct relationship between interest and saving. the interest rate structure. In every economy. The monetary authority determines the institutional interest rate after analyzing the economic system adopted by the country. interest rate should be net positive. So. For the use existing natural and other resources.
In the unorganized sector. etc. the traditional money lenders are very active in almost all parts of the country.4. The aim of these money lenders is to hold money lend to needy persons in order to earn the higher rate of return on interest. And rest of the population lives in the urban areas. such as village money lenders. the private savers. In some of the hilly areas the interest is still paid on the form of corn. relatives. merchants. The dominance of unorganized sector in the economy should be gradually reduced by increasing both numbers of financial institutions. In the rural areas. The traditional money lenders try to keep the peasants and the poor people permanently on debt. However. The interest rate they charges varies persons to persons. the credit suppliers are indigenous bankers and traditional money lenders. which shows that the rural people are not aware about the legally permissible rate. rice etc. the recent development in the banking sectors could be easily visualized in the urban areas also which has reduced the dependency of common people for credit on unorganized market. traders. The unorganized rural financiers are the traditional and important source of rural credit in Nepal. place to place and it also depends on he need and the condition of the credit that have to borrow. supply the major parts of the credit. This type of interest rates basically prevails in the rural areas. In the
. The access on modern banking facilities are still a distance dream for major portion of the common Nepalese people. however it is not the same for the different places and the situations. property owners.1 Unorganized Sector The unorganized rural credit system prevails in the rural areas of Nepal where about 86% of population live. The lenders take the high rate to the persons who go to the foreign countries for earning purpose. The rate of interest mostly on those kinds of interest is of 24% to 34% or above.2. Sometime it could around 50%. Even at present situation. friends.
a) Interest on government Securities The government fixes certain interest on the government securities. They are I) II) Refinance Rate NRB Bond Rate
. Development Banks and other financial institutions in the context of Nepal.2. The government securities are of different maturity periods and interest is given generally on the six months installment. the monetary authority of the country is non-profit making institution and it promotes the investment of the commercial banks by increasing or decreasing the bank rate. Commercial Banks. The development of the organized market is considered as the basic requirement for the development of an economy. In the organized sector. we get very updated and authentic data. Following types of interest rate are found in the organized sector of Nepal.2 Organized Sector Organized sector comprises the NRB. There are two types of interest rate operated by the NRB.unorganized there is the lack of adequate and authentic data so that the discussion of interest is only focused on the organized sector. And it is also controlled and regulated by the central bank. There are three types of securities which are I) II) III) Treasury Bills National Saving Certificate Development Bonds
b) Interest of Nepal Rastra Banks NRB. The interest rates prevailing in the organized market is very low in the comparison with unorganized one. 4.
Therefore the good banking system is that which properly manage the lending and deposit rate. NRB and Controlled Interest Rate NRB had controlled the interest rates for commercial banks and financial institutions for a long time.b) Interest of Commercial Banks The commercial banks are profit making organizations and hey give loans in high interest rate and accept low interest rate on deposits. The interest spread is defined as the difference between the lending interest rate and deposit interest rate. There are basically two types of interest rate operated by the commercial banks.e the interest spread = the lending interest rate. NRB is responsible for the policy measures. the interest rates differentiated between
. NRB and Interest Rate Determination Interest rate is monetary phenomenon and matter of concern of the monetary authority. In the developed economy. use of funds and types of collateral.the deposit interest rate. In case of Nepal. i. Further. the spread rate is within the limit of 1%-2% while in the developing economies it uses to cross even 6%. which are adopted to maintain and change the interest rate structure of the economy. Before the deregulation of May 1986. there were about twenty controlled lending rates differentiated between sectors. They are I) II) Lending Rates Deposit Rates
The Interest Spread The interest given on the deposits and the interest charged on loans and both are collectively known as interest rate. monetary authority. he high interest rate given on deposits attract the costumers for more and more saving and depositing in the banks while the low lending rate reduce the cost in capital promoting investment.
A move towards deregulation by granting commercial banks the commercial banks and financial institutions to fix interest rate was initiated on May 1986. the expansion of the banks branches in rural areas and gradual decline of currency deposit ratio over the years. During the years after deregulation. The direct control of deposit rates before the deregulatory moves initiation on May 1986 was considered a potentially effective instrument for mobilizing domestic savings.
. The interest rates had not changed much over the time. The overall impact of controlled interest rates and other regulations was that the asset and liability structure of the commercial banks was tightly controlled.the sectors. existing in the final system under the controlled interest rate regime. although the significant and historical upward revision in the interest rate structure took place in 1975. the banking activities developed rapidly as is evident by the growth of assets. Further. The wide margin between deposit and lending rates. The non-flexibility of interest rates restricted the institutions (with fewer resources) in mobilizing more savings by offering higher interest rates. the introduction of the commercial banks with foreign banks’ collaboration for commercial banking activities were some of the main reasons motivating the authority towards financial deregulation. The direct control of deposit and lending rates become redundant. the interest rate structure was not very rational and the central bank was determining the whole set of deposit rates and instruments. induced NRB to move towards partial deregulation of the financial system. The direct control of the lending rates provided an easy mechanism for credit allocation by differentiating between priority and non-priority sectors in which the former received concessionary interest rates. use of funds and types of collateral. Some of the inconsistencies.
The oligopolistic nature of the commercial banking system produced the cartelling in the interest rate determination. could not fully meet the objectives behind this step. Range of interest rates on the credit of same type or purpose not to be more than one percent. however. The rationale for ending the administered interest rate regime was to let the market forces to determine the interest rate structure. discrepancies were observed in the interest rate structure. effective from August1992. Interest rate structure could not be transparent and depositors and borrowers were not treated uniformly in terms of interest rates. In addition to this.NRB and Liberalized interest Rates Effective from August 1989. NRB also suggested the commercial banks and other financial institutions to limit the spread of interest rates at 6% within midDecember 1993. Thus instead of fair competition in the market. bring about flexibility in mobilization of financial savings and make efficient allocation of available resources. NRB. NRB issued the following directives to the banks and other financial institutions (40 Years of the Nepal Rastra Bank 1956-1996. higher
. Accordingly. As a result the. Interest rate liberalization. The compliance of the financial institutions to this suggestion however remained less than satisfactory. This was necessary because the widening interest rate spread had not only a harmful impact on the global competitiveness of the domestic financial system but also had created exploitative type of financial intermediation. lending rates increase faster than the deposit rates resulting wider spread between lending and deposit rates. Considering the situation of sluggish economic growth. slowdown in the growth of the private sector credit. the interest rates of the banks and financial institutions were completely liberalized. To correct this. commercial banks and financial institutions were granted autonomy in fixing their own deposits and lending rates. April 1996): I) II) Interest Rate on deposits of at least up to one year to be clearly spelt out.
B)The interest spread would be calculated as the weighted difference between interest income of commercial banks derived from the total domestic and foreign loans and advances. rising demand of the entrepreneurs of the and businessman for the reduction of interest rate and as per the commitment of the government in the budget speech of the fiscal year 1998/99 to limit the interest spread within 5% and. the NRB issued the following methodology on November 1998. i) Derivation of weighted Average Lending (interest) Rate = Total interest income from loans and advances.
. 1998. commercial banks had to make necessary adjustment their interest rate structure. money at call and balance held abroad
X100 Average loans and advances. As regard the calculation of weighted interest rate spread. In order to maintain this level. A) The commercial banks are required to maintain the weighted interest spread their deposits and lending rates below 5%. average balance held at abroad
ii) Derivation of weighted average deposit (interest) rate =Total interest expenses on total deposits X 100
iii) Derivation of weighted Interest spread =Weighted average lending Rate.weighted average deposit rate B) The interest spread would be monitored on the basis of half -yearly statistics (of August to January and February to July) that are filled in a prescribed format and dispatched to Banking Operation Department and Inspection and Supervision Department of the NRB. average money at call.interest spread of commercial banks. For the simplicity and understanding the account procedure. the NRB issued the following directives on interest rate on July. the following simple mathematical formula could be used. money at call and balances held abroad and interest expenditure payable on the total deposits held by the commercial banks.
the later is related to the stability of the Nepalese economy” (Sharma. which employs monetary authority’s control over the supply cost and use of money as an instrument for achieving the certain give objectives of economic policy. p 195) Mr Yubaraj Khatiwada also gives similar type of view. “policy instrument for controlling money in Nepal has been used for realizing long-term and short-term goals. While the former is related to growth. its role in the Nepalese economy should also be primary sought in economic stabilization rather than the economic growth” (Khatiwada.3. the monetary policy mainly focuses in economic stability. both Monetary and fiscal policies are implemented according to their relative effectiveness.3 A Brief Glimpse in Monetary and Fiscal Policy in Nepal The two important sub-divisions of economic policy are Monetary and Fiscal Policies.C) If the spread rate of any commercial bank exceeds the stipulated spread limit of 5%. “Since the monetary policy is mainly a tool of demand management. 1994.e. Gunanidhi Sharma gives this type of view. Mr. These tow policies are used as mutually complementary policies to serve as instruments of government’s economic policy and to achieve certain social goals. a) Money Supply b) Interest Rate In Nepal. Monetary policy aims at influencing the economic activities in the economy mainly through two variables i. Let us discuss them one by one. 1987. the provision of interest spread would be applied only after a year from the date of their operation. In Nepal.).
. the exceeding percent multiplied by the total interest income of that period would be taken as part of the supplementary capital for the calculating purpose of the Capital Adequacy Ratio.1 Monetary Policy in Nepal Monetary policy is defined as a policy. 4. In case of newly established commercial banks. 4.
Around the period 1980-1990. margin rate. NRB was oriented towards the aggressive banking service expansion and drive towards banking financing. Portfolio scheme and the interest free loans are too relevant for achieving the long-term goals” (Sharma. The evolution of monetary policy instruments and policy direction of NRB made a great contribution for the regulation of monetary system in Nepal. cash reserve regulations. credit policy. NRB was given the status of regulation authority in the year 1966. Then after from 19966-1980. p 195) NRB. it is imperative to consider it is an instrument foe realizing long term purpose and keep the rate reasonably stable.
. 1990-1999. interest rate. “As the rate of interest has a high positive correlation with the mobilization of financial savings. it initiated most of the monetary policy tools such as: credit control regulations. Until 1966. NRB’s job remained more challenging. the central bank of the country was established in 1956 but it started it started its functioning only after 1960s effectively. 1987. In the decade. With the economic liberalization and structural adjustment programs. without frequent changes. Hence the focus of the monetary authority was concentrated more in widening institutional setup for formulating directed credit programs to ensure institutional financial facilities to targeted sectors and group of the society. operation on secondary markets. open market operations treasury bills auction. its role was to help for the stabilization of the economy with proper demand management through the adoption of indirect monetary policy instruments. the efforts were focused on evolving NRB as the monetary authority and bringing monetary system under its control. refinance rate.Sharma further emphasizes the interest rate and says. NRB bonds etc. liquidity requirement.
Liberalization of interest rates. the monetary policy of 2007/08 has continued the bank rate and mandatory cash reserve ratio as prior years.
.5 percent respectively. To facilitate the cottage and small scale industries’ promotion. the monetary authority has the responsibility of widening access to institutional credit facility for priority sector and weaker sector of the society with the frame work of the liberalized economy. In the mean time. Mandatory cash reserve ratio had been set on 5%.The regulatory and supervisory role of NRB was also necessarily widened due to gradual liberalization of the financial sector along with marketed external sector liberalizations.5%. Operation Status of Monetary Instruments and Monetary Policy in recent Years The bank rate of 6. refinancing rate for the loans advanced to these industries has been fixed at 3. During this period.25% had been set for the fiscal year 2006/07. foreign exchange and exchange rate systems along with the entry of numbers of new financial institutions into the system has widened the scope of NRB activities from attaining and balance of payment stability to exchange rate stability and ensuring the healthy growth of financial system. export credit refinancing rate and sick industry refinancing rate has been set 3. However.5 and 1.
25 3. economic growth and balance of payment equilibrium is called compensatory fiscal policy.5 1.5 3. To provide legal footing to provide Repo and Reverse Repo auctions. the sale reverse Repo have remained quite active for liquidity management.0 Source: Various Quarterly Economic Bulletins of NRB from 1999 to 2007.5 Currency) 3. In this context.5 Sick Industries Credit Small and Cottage Industries Bank Rate 5.25 6.5 6.25 CRR 6.25 3.0 5.5 1.5 3.3. 4. The two systems used for adopting fiscal policy in an economy are government’s budget speech and period plans.1 Bank Rate.2 Fiscal Policy in Nepal Fiscal policy is an economic policy which basically deals with the receipts and expenditures of the government and refers to the budgetary policy of the government.0 5.0 5. Budget is the short-term
. the commercial banks had excess liquidity due to drags in economic activities and overall investment.25 6.0 3.5 2.0 3.Table 4. taxation and public borrowings. All four kinds of auctions (Purchasing and Selling auction as well as Repo and Reverse Repo Auction) remain endorsed by the current monetary policy as well.5 Currency) 2. price stability. The manipulation of the government expenditure and revenue to achieve national objectives such as high employment.5 1.in the fiscal year.0 1. Refinancing Rate and Cash Reserve Ratio (CRR) Instruments 2003/04 2004/05 2005/06 2006/07 2007/08 Refinancing Rate Export Credit(Domestic 4. Open Market operation (OMO) is being used by as an instrumental tool of monetary management.5 2.0 5.25 Export Credit(Foreign 2. Fiscal policy operates through the changes in government expenditures.5 5.0 2. an agreement called Master Repurchase Agreement has been signed between the NRB and commercial Banks during the fiscal year 2006/07.
5% in the end of three years plan. The budget is prepared within the objectives of the periodic plans. the per capita income would grow by 3. In Nepal. Presently three years interim plan is under implementation after the completion of tenth five years plan one year ago. During the three years plan period. And this year the economy is projected to grow by 5. This interim plan is introduced to adjust the uncompleted programs of the past to adjust with the newly developed political scenarios. The interim plan has targeted the economic growth of 5.5% respectively.6% and 6.
.3% and employment by 3. As per the elasticity of poverty level with economic growth. poverty is believed to be reduced to 24% in the ending of the interim plan. the inflation rate is hovering on double digit. the first fifth year periodic plan was started on 1956.5% considering the resources position from domestic and international level. In overall economic growth.5%.economic scheme of the government that governs the period of one fiscal year but the periodic plan is the long-term vision. at present. However. agriculture sector is induced to commercialization from the subsistence sector. Due to this. growth on employment and the progress of targeted programs. It has projected the annual inflation rate of 5. the agriculture and non-agriculture sectors are expected to grow by 3.5%.
we divide this chapter. we perform quantitative as well as qualitative analysis. percentage change. growth rate difference ratios and graphs. we have employed various data of different years. But in the fourth part. In this research work. Since the money supply position has very close association with the interest rate regime. two definitions of money supply and their trends are studied using the time series data of the period 1998-2007. It means there is no reserve money in the government vault. all the data are extracted from the June-July period of all years. the second part covers the data analysis of interest rate structure in Nepal and the third part covers the data analysis of the impact of interest rate and on deposit collection or mobilization and total outstanding credit. However. percentage share. Using the time series data. the analysis is done on the basis of estimated regression equations and correlation coefficient between the relevant variables. we basically focus on the contemporary phenomenon of the interest rate. still the larger sum of the cash is held
. For the analysis purpose. However. the currency held by the government in all ten studied years remained null. into four parts.4 The Analysis and Findings Regarding the objectives of the study.4. it is necessary to briefly discuss about the money supply position in the economy.1Money Supply Process in Nepal In this chapter.1. regression and the correlation are fitted between the variables and results are presented in tabular form. In total cash. the data are analyzed with the help of actual figures. currency held by the government. only the banking sector and the public are holding all currency and the government is always running without any reserve cash. Therefore. In the first and second parts.4. 4. According to the table 5. All over the data analysis. The first part covers the money supply position in Nepal. banks and the public are the determining factors of money supply.
9 105.2 38. Observing above table.6
.048.3 42.834.In Millions) Currency Held By Total A=G+B+ P Public(P ) 30.8 173.515.2 63.373.475.7 162.6
58.168.893.9 125.1.9 90.1 28.782.412 60.7
Source: Various Quarterly Economic Bulletins Published by NRB from 1999 to 2007.218.192. the level of total currency holding seems gradually rising across the study period.4 83. we can see that the public holding of currency is higher than the currency holding of the currency by the banking sector in all ten years of our study period.658.6 7359.1 55.488.7 59.394.364.04 in 2003.143.137.893.0 5908.6 123.8
33.949. It is Rs.2 66.1 83.137 98819.567.650 52.8 71.4 114.2
47.1 32.0 207.2 243.3 4283. 875.34 in 2007.4 75.1 56.
In the table 5.90.735 66.548.696.7 43.8 77.608.3 56.33782.198.3 83.1 77.755. Obviously observed factor is that only limited people of urban and semi urban areas are getting modern banking facility.252.9 38.725 38.2 M1 and M2 Supply Situation (Rs.380.2 73.8 74.6
24.2 52.295.0 48.692.741.0 144.784.9 4723.109.1 276. However this level seems gradually increasing across the years and it reaches to 12.857.3 84.2 209.193.9 million in 1998 and it rises to Rs.9.4 99.8 4773.8 143.625.8 Demand Deposits (DD) M1=A+ DD Time Deposits (TD) M2=M1+TD
Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Govt(G ) 0 0 0 0 0 0 0 0 0 0
Bank(B ) 2889.7 45.
Table 4.7 73.038.294.4 3507.032.9 4908.504. However it has been reduced to 11. It means the economy is still dominated by the unorganized sector and people have either no access to modern banking facility or they are not accustomed to do banking transaction.2 123.403.2 56.5
106.875.0 4116.2 91. In the first year.6 180.584.502.698. we can see that the ratio between currency holding between public and banking sector is hovering around 10 to 12.5 67.9 68.960. Similarly.885.268.952. the ratio of currency holding between public and banking sector is 10.by the public than the banking sector.447.7 3310.2 61.412.2 34.984.303.4 164.557.218.926.
1 in 1998 and it also gradually rises during the study period and reaches to Rs71504. It is the clear indication of underdeveloped economy where the modern banking facility is still to whole economy and the population. it has reached to Rs. The M1 supply situation is appeared in the rising trend.162380. Here the M1 supply rises marginally in the year 2005 in the comparison of the year 2004 by Rs1806.million in 2007.4 millions.6 million in 2003.5 millions. However. the currency hold by the public is occupying the major portion of M 1.6 millions in 2007.105192. Similarly the demand deposits are Rs. However.18687.24952. the M1 supply rises optimally in the year 2007 in the comparison of 2006 by Rs. However it reaches to Rs. Obviously.58735 million in 1998. It is around Rs. the demand deposits remain always lower than the total currency holding by the government and the public level.
. However. Moreover.2 millions in 2007. M1 is the composition of total currency held by the public and the total demand deposits.
However.000.Here we can depict the position of M1 and M2 more specifically in the graphical way.00 0. During the study period the supply of M 2 marginally rises by Rs.000.00 100.1
General Trend of Narrow and Broad Money Supply
300. It reaches to Rs.00 Rs in Millions 150. 4. M4.00 250. The level of time deposits also seems gradually rising across the study period.2
M2 is the broad money supply and it is the summation of M1 with the total time deposits. Since. time deposits is the major portion of the M2. in the context of Nepal.2 million. 338 in the year 2007 in the comparison of 2006.5 millions in 2007. it plays the determining role in the determination of M2.000.000. time deposit is Rs. only M1 and M2 are found on under practice. M3.000. Figure No.47303.75548. the M2 represents the comprehensive money supply position in the economy. It gradually rises and reaches to Rs.114032. it optimally rises by Rs. Therefore. In 1997.00 200.00 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: Based on table 4.9 millions in 2003.884. Moreover.6 in the year 2002 in the comparison of 2001. M5 and so on are also found on definitions.00 50. However.15.
33244. In the beginning year of our study 1998. the interest rate were fully controlled and administered by the interest rates were completely liberalized.The supply situation of M2 is also following the rising trend.6 millions in the year 2007 in the comparison of 2006 within the study period. Effective from August 31. the interest spread and the impact of lending and deposit rates of commercial banks on time deposits and loans is studied using the time series data for the period of 1998 to 2007.106038.0 millions in 2003.1The Interest Rate Structure in the Organized Market of Nepal Before 1990. the commercial banks and financial institutions were granted autonomy infixing their own deposit and lending rates. Accordingly. by NRB).4. the interest rates of banks and financial institutions were controlled and administered by the monetary authority of the country (i.4. 4. Here we have limited our study only in the commercial banks (A-Class financial institutions licensed by NRB) to make our study more precise. total M2 is Rs.2 millions. the interest rate prevailing in the organized sector. The rationale of ending the administered interest regime was to let market forces to determine the interest rates.2 Structure of Interest Rate in Nepal In this part. bring about flexibility in the mobilization of financial savings and make efficient allocation of available resources.2 shows the interest rate which prevailed in the organized market in Nepal in the study period of 1998 to 2007.276412. Finally it reaches to Rs.2. M2 supply has marginally increased by Rs.
.e. The table 5.7 millions in the year 2007. Then it rises to Rs. However. 4.2675 millions in the year 2005 in the comparison of 2004.180741. 1989. M2 has been increased optimally by Rs.
III) Development Bonds Development Bonds are also means of government borrowing from the public.6% in the 2000. the treasury bills rate down to optimally 1.
II) National Saving Certificate The national savings is also a kind of investment where common people use to save their money and use to get certain interest rate.25% from 1998 to 2002.75% for the years 2005.5% to 13% on the year 2004 and 2005. I) Treasury Bills Issue of treasury bills is one of the means by which the government borrows the money for short periods. The declining trend continued and the interest rate stood on 6. Then it reduced to 7%-13% in 2003. The government gives certain rate of interest on treasury bills. Finally it remanded on 3%-6. On the year 2006 and 2007. It stands on 9%.94% in 2005. 2003 and 2004.
In the later year. it stood on 3. In 2006. Treasury bills are4 usually used for a period of 91 days. of less than one year maturity period. Later.47% in the year 2004.5% on 2000 and 2001. it stood on 6. However. It is also a small saving scheme to collect the government loan from public.A) Interest on Government Securities There are three types of government securities.13. 2006 and 2007. The development bond was 3%-12% on the year 1998 and 1999.25% in 2006 and down to 2. national saving certificates and development bonds. The government fixes the development bond interest rate. Moreover it stood on 3%-8% on the years 2002.77% in 2007.
. This instrument of saving is evolved from UK where a separate bank was set up to arrange the transactions.4% in 1998. treasury bills. The treasury bills rate was 4. it seems heavily fall on the year 1999 and again reached to 5. it slightly went up and reached to 3. viz.5%-8%. It also seems on reducing trend and down to 3%-10.
758 4-7.518 14.4 913.259.5
8.5-7 3.25 3-8
2.8 913.2513.75 3-6
1.5-4 2. Nepal Rastra Bank Refinance Rate NRB Bond C.5-6.255 2.25 310.75 67.255 2.5 8-14 614.25-5 2.5 8-14 6.5 4-6.5 12.94 6.25 6-8.5 9.5 -
1.3 Structure of Interest Rates in Nepal
(Percent per Annum) Types A.5 6-8 7.5 10.5 10-18
2-5 2. Government Securities Treasury Bills National Sa.75 4.75 5. Commercial Banks 1.56.77 6-8.755. Lending Rates Industry Agriculture Export Bills Commercial Loans Over Draft
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
4.54.5 1214.57.6 8.5 7.25 3-12
2.Table 4.5 10-16
3.5 412.515 916.5-6.513 36.513 3-8
3.47 6.2510.58.258.516 13.98 7-13 3-8
1.25 2.5 7-16 10-18
2-4 2-4.56.5 10.5 2.78 813.515 11-17 10-19
4-6.514 10.5 12-14 6.514.56.257.754.5 910. I) Refinance Rate Refinance rate means the rate at which NRB gives the credit facilities commercial banks encouraging them to provide export and industrial credit.257.513.5
Source: Various Quarterly Economic Bulletins published by NRB from1999 to2007.35 310.5-6 3-7 3.5-4 1.25 11-17 1415.5 2.55.5
1.758.5 36.5-14.516 11-17
2.5-6 3. They are refinance and NRB bond rate.55.513.758 5-8 6-8.5 813.5 9.5 914.512 13.25 3-12
5.5 7.5 7-15 12.55.513 511.5 -
2-5.75 4.755 1.520
5.5-6 3.5 2.5 2.514.5-13 5-11.515.5 9. Deposit Rates Saving Deposit Time Deposits 3 Months 6 Months 1 Year 2 Years and Above 2.97 8. NRB committed to make available credit to commercial banks at the rate of 9%
B) Interest of Nepal Rastra Bank There are two types of interests of Nepal Rastra Bank.5 2.513 411.517 14.5 714.513.5 3-6.5 9 -
4.515. Certificates Development Bond B.512 7.75 -
2-5.5 10-13 4-12 8-14 514.5 7.5 -
3.5-4 1.05 8.75-4.75
6.75 1.5 7.
no data of development bond rate are available. II) Development Bonds Rate Development bond is issued by the Nepal Rastra Bank. it slightly went up and stood on to 2%-5% for the years 2006 and 2007. They are the interest given on the deposits and interest charged on the lending. However.25% in the year 2002. it was 6.5% for the year 20001 and stood on 2-5. the interest rate seems gradually declining over the periods. by the nature of time deposits. However. b) Time Deposits Basically in our context. 2003 and 2004. They are saving deposits and time deposits.5 for the years 2002. in the study period of this research.5% for the year 2005 and 1. Further it declined to 1. it drastically reduced to 4-6. 6-months. 3-months. In the year 1998.25% for the year 2006. The commercial banks gives certain percent of interest on deposits based on the time of amount deposited. Obviously. During the
. I) Deposit Rates There are only two types of interest bearing deposits. 1999 and 2000.5-5. a) Saving Deposits The interest given by the commercial banks on the study period on saving account ranges from 2% to 8%. However it reduced to 2. However.75%-5% in the year 2005. It remained 1.5%-6.75%-8%. The deposits on the longer time period carries higher interest rate and the deposits on the shorter time period carries lower interest rare. However. 1-year and two years and above are under practice.5-6. the interest given on the time deposits is determined according to time period. C) Interest of Commercial Banks There are two types of interest operated by commercial banks. time deposits namely.for the years 1998.
export bills. commercial loans and overdraft.5% on the year 2007. There are five types of the lending rates. the interest rate was 9. Finally it settled on 2. In case of one year time deposit. This also shows the declining trend and reached to 3. II) Lending Rates The lending interest rates are those interest rates. 2006 and 2007. Finally for the year 2 years and above time deposits. The commercial banks use to charge the different interest rates on the different creditors of the economy. agriculture.5% for the years 2006 and 2007.5.5%12%. Over the years.25%-7. On the year 2007. Then it gradually declined and down to 2.5%-17% on the year 1998. it had been down to 2.5%-5% for the years 2005.5% on the year 1998. the interest rate was 6%-8. charged by the commercial banks while giving the loans to the relative sectors of the economy.5%-5. it seems gradually falling over the years and down to 2%5% on the year 2003 and stood on 1.
.5%-6% on the year 2003. on the six-month time deposits.5% on the year 2007. it was 9%-10. They are lending to the industry. Similarly.5% on the year 1998.5% on the year 2003.5%.5%. three months time deposits have 5%-8% of interest rate in the year 1998. the interest rate was 13. However.75%-4. it gradually reduced to 3% to 7% on the year 2003.study period. Major five are as followings: a) Industry In the industrial sector. Finally it settled on 1. It seems gradually reduced and finally settled on 8%-13.
2.5%-12% on the year 2002. it stood on 11%-17% and again down to 6%-14.5%-14. d) Commercial Loans On the commercial loans.5%-15. it was 9. It also seems on the declining trend reduced to 10%-17%. On the commercial loan. It was 14.13% for the year 2004. On the year 2007. the interest rate was 5%-11. In the export bills.5%-205 on the year 1998.5%-18% on the year 1998. the interest rate seems lower than the agriculture and industry over the years. For the year 2004. It was 14. the interest rate was higher than in industry. it gradually declines and down to 7. Over the years. here we have picked the commercial loaning as the major tool of analysis of our credit system. It was 6.5% on the year 1998 and 1999. Therefore we would use one year time deposit
.2 Spread between Commercial Loaning out of Interest Rate and One year Time Deposit Rate in Nepal Since the commercial loaning is the most dominating sector in the outstanding credit and shows almost representative feature of the overall crediting system. 4. it was reduced to 8%-14% on the year 2005. Moreover. agriculture and export bills. For the years 2005 and 2006. Similarly. It slightly downed to 12.5%.5%.5%-13%.5%-16% on the year 2003.5% for the year 2005. the interest rate was 12. 2006 and 2007. the interest rate was 13.Interest rate charged on the agriculture sector seems higher than in the industrial sector. e) Over Draft On the over draft.5%-16% on the year 2007 and it gradually declines over the years. the interest rate seems higher than any other sectors.4.5% for the years 2000 and 2001. Therefore. the time deposit rate for one year period is the almost representative factor of the overall interest rates on deposits of various schemes. it stood on10. c) Export Bills On the export bills. 2006 and 2007. For the years 2002 and 2003.
75 3 8.5 16 3.25 5 5. On the following three years the lower limit of the spread rate slightly down and settled on 5. Here.5% while the upper limit is 8.75 2001 7 16 4.75 8. On the following year of 1999. However. Here the lower and upper limit of the spread rate stood on 4% and 9% for the fiscal years 2002 and 2003.5 8.5% for the fiscal year 2001. the lower limit of spread rate was reduced to 2.75 9 2007 8 14 2. the lower limit of the spread rate is 4.25 9. On the year 2004.75% and upper limit again touch the highest level of 9%.5 4.5 1999 11 17 7. even the lower limit of the spread also cross the international standard of 2%-3%. the upper limit stood on 8. both the lower and upper limit seem reduced to 3.5 7.25 2002 7.75 2005 8 14 2. Table 4.5%.5 7 4 9 2003 7.4 Spread Rate between Commercial Loaning out of Interest Rate In One year Time Deposit Rate in Nepal
Commercial Loaning Out of Interest Year (%per annum) Lower Upper Lower Limit Upper Lower Lower Limit Limit Limit Limit Limit 1998 13.rate and commercial loaning interest rate to analyze the overall spread rate position of interest rate regime.75 9 2006 8 14 2.75 2.75% and the upper limit slightly down to 8.5 2000 9 16.5% respectively showing little bit corrective phenomenon.5 18 9 10. the lower limit of spread rate touch the peak level and stood on 6.5 16 3 7 4 9 2004 9 14.75 6.25 5 5.25 5 5.75 9 Source: Various Quarterly Economic Bulletins Published by NRB from 1999 to 2007 One Year Time Deposit Interest Rate (% per annum) Interest Spread In %
In the beginning year of our study (1998).75 5. Catching the similar trend of prior years.25%.75% from 9%.
.5 2.5 6 7.75 7.5 8.5 3.75% and 8.
six months. The proportion of bad debt is still higher in many commercial banks. 6 months. The lowest limit of the spread rate is 2. Lack of modern banking technologies in various branches of the banks. 6. basically two largest government commercial banks and unnecessary government intervention in the past. The high interest spread in the prevailing organized market of the economy is due to the following reasons. They are of 3 months. 4. Moreover.
4. 3. they occupy very nominal level of saving and here we would apply only four types of fixed saving deposit schemes viz: three months. The interest free nature of the Cash Reserve Ratio (CRR) deposited in NRB 2.3 Interest Rates on Fixed Deposits and Corresponding Level of Deposits Basically. 1. High operating cost of those institutions. other schemes of time deposits rather than above mentioned four are also in little bit practice.5% while the highest limit of the spread rate is 9%. 5.4. Lack of sufficient skilled manpower. 12 months and two years and above time deposits.
.Over the years of the study period. However.2. the spread rate seems fluctuating. four types of fixed deposits or time deposits are under practice in our context. one year and two years and above time deposits. The weak financial management system of the banks.
4 99.25-5 2. Later.268.5-5.5 6-8 7. it is understood that higher interest rate on fixed deposit schemes would mobilize higher volume of saving.4 1.5% on 1998. In Millions) Commercial Banks Fixed Deposits Interest Amount Rate(percent per annum) of Fixed Deposits (In 3 6 1 2 Years Million Moths Moths Year And Rs) Above 5-8 6-8. it downed to 2.25-8.Table 4.5 9-10.5-6 3.5-6. the
rate was 9.2 2. For the one year time deposit. the interest rate on three months fixed deposit scheme was 5%-8% in 1998.5 9.75 4. On six months fixed deposit scheme.2 4-7. it was 6%-8.5-7.5-5. 2006 and 2007.5-12 47.8 2. Fixed deposits with shorter time period have lower interest rate and longer time period have higher interest rates.5-4 1.5 7.5%-5% on 2005.4 2-4 2-4.25 56.348.75 3-6 83.5-4 1. Over the study period.25-10.25-7.5 73.25 2.5 114.488.5%-12%
.5-6 3-7 3.5 66.3 1.5 2.5%-6% in the year 2001 and remained 1.5 2.75-4.2 4-6 5-6.5-6 3.5 2. the interest rates given on the fixed deposits saving are differentiated by the time factor.5-6.
Obviously.75-5.5%-6% on the year 2002.5 Interest Rates on Fixed Deposits And Corresponding Level of Time Deposits
(Rs.25-7.960.302.75-4.5 2.5 75.25-9.5-4 2.032. For the time deposits.4 1.75 5. Theoretically.5 74. the interest rate was 9%12% in 1998.137.5-4.75-8.75 6-7. Later. Finally it has been settled on 1.25-5 2.5-7 3.05 84.75%-4. It had been settled on 2. two years and above.475.7 2-5 2.5
Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Sources:Various Quarterly Economic Journals Published by NRB from1999 to 2007. 2006 and 2007.596.25%-5% for the
fiscal years 2005.373. it also catches the downing trend and the one year time deposit rate stood on 3%-7% on the year 2003.75 4.4% on the year 2006 and 2007.25-5 2.5-6. it starts gradually falling and reached to 2.
the interest rate was settled on 2. However.4.2 millions. It rose over the years and reached to Rs. the rate is definitely lower than the fixed deposit schemes. total saving mobilization of commercial banks of fixed deposit schemes of different time period was Rs.99032.4.7 millions in the year 2002. the total deposit mobilization seems rising challenging the theoretical concept. For the fiscal years 2007.114032.15338 millions. Here the depositors are rewarded certain percentage of interest on their deposits. Over the years. It continually rose and reached to Rs. the deposit mobilization minimally rises by Rs.2.47302. by contrast. the interest rate on fixed deposit on different schemes seems gradually falling. It also shows the declining trend and stood on 3.5% on the year 2002 and 2003. Over the study the amount of saving mobilization seems gradually rising despite of the falling interest rate challenging the theoretical concept that the higher interest rate use to collect the higher sum of deposits and vie-versa. over the study period. The optimal rise occurs in the year 2006 in the comparison of 2005 by Rs.5 millions in the year 2007.5%.4Commercial Banks Saving Deposits Corresponding Level of Saving Deposits Interest Rates and
Saving deposit schemes is the most frequently used banking account and mostly used by the common people.7 millions in the fiscal year 2002 in the comparison of 2001. 4.5%5.25%-7.974. In the year1998.in1998. According to table 5.5 millions in 2006 and finally settled on Rs. However.74373.
it stood on Rs. Then the interest rate starts falling and downed to 2. In the case of saving deposits.6 Commercial Banks saving Deposit Interest Rate and Corresponding Level of Saving
Commercial Banks Saving Deposits Interest Rate(Percent Per Annum) 6.Table 4.5 Impact of Spread Rate on Total Deposit Level and Outstanding credit Level Obviously.5-6 2-5 1.2830 millions. Therefore.3 millions for the fiscal year 1998 and it gradually increased over the years.25 2.236.7 83.703.3 50.5-6.75%-5%.75-8 4-6. Over the study period.8 65.
On the saving deposit scheme.6 80.817. Following the rising trend it reached to Rs.987.36885.9 millions.75-8 5.25% for the fiscal year 2002.106. It slightly rises and reached on 2%-5% for the fiscal years 2006 and 2007. In the last year of the study 2007.23060.140.5%-6.5 2.013. the minimal rise occurs in the year 2002 in the comparison of previous year by Rs.97236. The falling trend continued and reached the least level in the year 2005 with 1.6 millions. 4.2.3 millions in the fiscal year 2003.573. And the optimal growth occurs in the year 2007 by Rs.5 151.75-5 2-5 2-5 Amount of Saving Deposits (Rs Million) 36.174633.633. total deposits stood on Rs.3 174.5 3.75%-8% in the year 1998.885.1 130.4.5-6.3 114. the interest rate was 6.9
Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Sources: Various Quarterly Economic Bulletins Published by NRB from 1999-2007.7 97. the lower spread rate is always desirable in the
. the higher spread rate in the economy creates the adverse effect in the economy.
662.3 50.economy to create conducive environment for all economic activities.435.5 137.303.75 9 9 9 Various Level of Deposits Saving 36.080.7 114.244.25 9 9 8.6 120.960.687.4 99.106.100. 1 231. In this year the range of spread rate is 4. it never reduces on the satisfactory level. 9 Fixed 47.140.2 34.129.6 33.236. 9 179.6.543.573.1 25.2 37.817. However.6 80. 1 130.75 Upper Limit 8. almost all developing nations like Nepal have been victimized by the alarmingly high level of spread rate which we have witnessed from the contents of table 5. Over the years this study.352.548.696.5 4 4 6.8 112. In the beginning year of our study (1998).75 3 2.8 74.860.6 114.75 5.7 83.647.7 Impact of Spread Rate on Total deposit Level and Outstanding Credit Level (Rs. However.755. the spread rate is fluctuating.100736. 3 124.885. 2 182.373.3 84.703.862. 3 174. 5 151. 6 153.268.75 5.754.7 Total 100.082. 1 288.098.75 8.5 8.6
Table 4.488.2 73. 6 201.848.5 3.5 7.547. 6 231. In Millions) Spread Rate in % Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Lower Limit 4.013.3 millions.9 159.4 114. 6 248.7 97.75 5.638. Here the lower limit of the spread rate
. the spread rate always stands on the higher level and it never shows the corrective way (reduction of the spread rate).386. the total deposit level seems gradually rising.2 56.137.2 28.8 65.633.323.037.8 17.2 66. total deposit stood on Rs.7 333698.2 84. despite of the high level of spread rate.1
Sources:Various Quarterly Economic Bulletins Published by NRB from 1999 to 2007
As we mention in the table 5.032.7 75.475.5 99.031.4 45.814.577. However. 1 Total Outstanding Credit 71. 5 Current 16.5%.6 20.5%-8.453.4 83.663.612.987.1 198.7 24.736.
For the fiscal year 2007. Leaving few years. their share on total deposits by percentage. For the fiscal year 2004. On the following three years of our study. Over the study period.45263 millions. the total outstanding credit grew optimally by Rs. the total deposits grow least by Rs. Over the study period. the upper lower limit was 6.32996 millions than the previous year.2 millions. the corresponding total deposit level rapidly rises in almost all years.71244. However.39525.4.6 Share of Different Deposits on Total Deposits and Percentage of Outstanding Credit on Total Deposits In this section we would briefly discuss about the position of various forms of saving schemes. However. the total outstanding credit is also rising along with the total deposits.5% and upper limit was 9%. It was Rs.2000 millions annually. It reached to Rs. the lower limit little bit fall and stood on 5.75%.2966.2.75% and the upper limit was 8. Over the study period.
. it had been grown by Rs. the total deposit collection rises by more than Rs. it reached to Rs. the total outstanding credit had risen in the reducing rate.144662. in the following years both the upper and lower limit goes up.7 millions. 4.4 millions in the year 2002 in the comparison of previous year. the percentage of the total outstanding credit over the total deposit mobilization is also analyzed here. And the deposits grew optimally in the year 2007 by Rs. In the last year of our study (2007).75% and the upper limit stood on 9%.remained below 4. It means. Moreover.231844.6 in the year 2002.6 millions in the comparison of previous year.
61 40.74 37. the share of the fixed deposits has declined from 46.97
Table 4.81 34.30 63. The higher the level
. Consequently. In this year.58 40.72 67.33
Share of Fixed Deposits by % 46.33% from 55.Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Share of Saving Deposits By % 36.7 also indicates the very important fact of the economy i. In the following years. about the percentage of total outstanding credit on total saving.91 69.22 49.99 68.42% respectively.46 36.42 14. the fixed deposit contributes the highest share of the total deposit. 49.98 62.97 13.92 40.84 62.95% and 16.8 Share of Saving.91 48.931 12.e.95 45.1%.68 43.17
Share of Current Deposits by % 16. Fixed and Current Deposits On Total Deposits by Percentage and Percentage of Outstanding Credit on Total Deposits Sources: Various Quarterly Economic Bulletins Published by NRB from 1999-2007
In the beginning year of the study.34 14. fixed deposits and current deposits contributes 36.25 55. In 2007. Similarly.88 59. The least level of the total deposits’ share is in the year 2006(12.17% in 2007.02 33.43 64.48 34.21 42.60 13.49% in 2007. the share of the current deposits was 16.93 45.42% on total deposits in 1998 and it has declined to 13. the share of the saving deposits gradually rises except one year.12 13. The table 5.48 13.962 13.962%).55 52.55% in 2006. the saving deposit.49
Percentage of Outstanding Credit on Total Deposits 70.36 52.95% of 1998 to 34.81 59.09 45.31 14. the share of the saving deposits declines to 52.
323.6 180741. it again shows the rising trend and the total outstanding credit reached 68. It slightly downs to 67.8 11.1 276412.5 137.4 164625. 4. The total outstanding credit is 70.6 120.of outstanding credit shows the better position of economy and the vice-versa.8
Table 4. In the later years.844.30% of total saving.9 159.080.2860.2.1 198.0 207218.7 231.453. The relationship between the money (M2) and total outstanding credit in the
Year Broad Money Supply (Independent variable X) 106038.754.91% of total saving and the total out sanding credit settled on 69.2 84.9 Broad Money Supply and Total Outstanding Credit (Rs.7 114.7
contemporary interest regime help regression analysis with the help of the following table rate is of
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
studied with the
5.244.7 The Regression Estimation Regarding the objectives of the study.7 Total Outstanding Credit(Dependent variable Y) 71.2 123364.082.97% of the total saving in the year 2007.4.8 173193.2 243168.662.848.2 209893. It continually shows the falling trend and touched the least level in 2004 with 59. In Millions)
.5 99.43% in 1999.0 144394.72% of the total saving in 1998. the related variables are tested with the help of regression Estimation and empirical results are presented in the tabular form.
5 b= 0.Sources: Various Quarterly Economic Bulletins Published by NRB from 1999-2007
Here. we get the values as a= -33.4. By applying summing rule on the above simple regression equation Y= a+bX. (B) Now applying the quantitative techniques in the above two equations A and B. a= Constant Variable b= Slope of the regression equation X= Independent Variable of the equation which represents the broad money supply i.
4. M2. Since. (A) ∑YX= a∑X+b∑X2 ………. this fitted regression line is considered as the good estimator due to its higher capacity to explain the total variation. We get the coefficient of determination (r2) as: r2 = 0. Y= Dependent Variable which represents the total outstanding credit.e. our fitted simple regression equation becomes Y=-33. we get. by applying the quantitative techniques. the simple regression equation is Y= a+bX Where.7 The correlation Estimation
.8496. ∑Y= na+b∑X …………….926X Similarly.96% of total variation is explained by the above regression line.8496 As the value of the coefficient of determination is 0.5+0.2.926 Now. the 84.
848.098.3 71. there exists perfect negative correlation between the variables.543.814.754.129.2 112.7 2002 182.662.9 99.5 2000 153.6 2003 201.687.6 84.10 Total Saving and Total Outstanding Credit (Rs. Year Total Saving (X)
The correlation coefficient between two variables X and Y.080.8 2001 179.7 2007 333698.1 231.
.6 137.244. usually denoted by rxy is a numerical measure of linear relationship between them and it is defined as: rxy= N∑XY-∑XWY [N∑X2 – (∑X) 2 [N∑Y2. In millions)
Total Outstanding Credit (Y) 1998 100.(∑Y) 2]
If r =-1.9 2005 248.1 2006 288.6 114.1 198.037.5 2004 231.736.453.082.1 Sources: Various Quarterly Economic Bulletins Published by NRB from 1999-2007.323.In this chapter.1 159.860.
Table 4.577.435.2 1999 124.647. we would establish the correlation between the total outstanding credit and total saving level in the contemporary interest rate regime.6 120.
4. in the case of our financial market. At this juncture. This trend
. there exists no correlation between the variables. we get correlation coefficient as. this condition has not been realized despite of the large numbers of financial institutions including 25 commercial banks. it means run according to the sprit of perfect competition. there exists perfect positive correlation between the variables.9. If the Market is efficient. high degree of correlation exists and if it is nearer to zero. However.87. it is the instrumental factor to determine the level of deposits and credits. the intervening role of NRB is realized. Moreover. the spread rate use to be obviously lower. 4. r = 0. If the correlation coefficient is near to unity. the spread rate position occupies very important place in the interest rate regime. in the case of the organized financial market.If r = 0.8 Factors Affecting Spread Rate Obviously. we get the correlation coefficient between total saving(X) and total outstanding credit. It means the total level of saving and total levels of outstanding credit are highly correlated. low degree of correlation exists.2. The awareness level of depositors is still lower and they are depositing their money in those financial institutions where the deposits rates are lower than other financial institutions with high interest rate. This means there is high degree of positive correlation between the total outstanding credit and total saving level in the economy in the prevailing interest rate regime or structure. If r =+1. NRB is not playing the intervening role in the market that’s why commercial banks are not forced to maintain the spread rate in the lower level.
By applying the quantitative techniques in the variables of Table 5.
its fundamental characteristics.should be changed to maintain the low spread rate which we are witnessing in our financial market since the low spread is always beneficial for both depositors and investors. the prior research works done in the related fields are reviewed. Here. NRB could use its both direct and indirect tools to keep the lower level of spread rate along with the counseling for financial institutions and awareness for public. it is impossible for me to get any research works precisely related to the spread rate position in the interest rate. the articles. the role real position of our banking and financial sector as well as we briefly discuss about the fiscal policy of the Nepalese government. CONNCLUSIONS AND RECOMMENDATIONS
5. the hypothesis. In the second chapter.
SUMMARY. The Classical. Here the literatures based on related topics on the interest rates are incorporated. the limitations and the chapter scheme of the study are briefly incorporated. I am not sure whether no research works is done on the related topics or they are not available in the accessible places for common people. neo-Classical. the objectives. Finally.
. major indicators. these theories are remained mute over the spreading position of the interest rate. However. However. The statement of the problems. the significance. literature and the research works included in this research work are of both domestic and the global context. However.1 Summary The first chapter of these dissertations contains introduction of the Nepalese economy. Keynesian and Modern theory of the interest rate are reviewed.
the role of the NRB in the interest rate regime before and after the liberalization. the research methodology of this research work is briefly introduced. overall interest rate position. various kinds of instruments used by the NRB to attain the desirable economic status. Then the regression and the correlation are fitted to show the relationship between different variables. different table depicting money supply position. In the forth chapter. Here. Here. correlation coefficient etc briefly are introduced used in the research work. basically the in the financial market. various data related with our objectives are collected and applying the appropriately analyzed. regression analysis. Similarly.In the third chapter. different terminologies like dependent variable.e. Moreover.2 Conclusions Following conclusions can be drawn from the analysis of interest rate regime of the contemporary economy. the contemporary interest rate and spread rate position in the Nepalese context. their positions. 1. The fifth chapter is the most essential part of this dissertation. On the course of analysis. independent variables. the correlation and regression analysis are interpreted by using quantitative techniques. spread rate position. The organized market is rapidly rising in the recent years after the adoption of the liberalization economic policy. their role and nature are briefly introduced. The rising numbers of the financial institutions have increased the
. Moreover. Both quantitative and descriptive methodologies of data analysis are employed. basically the commercial banks are highlighted. the major objectives of the fiscal policies and monetary policies are highlighted. Moreover. 5. we have briefly introduced about the theoretical discussion of the subject matter i. Here. the role and positions of the financial institutions. saving and deposit level as well as the total out standing credit are analyzed.
Moreover.e. it used to be 2%-3% and in developing nations. higher the deposit mobilization and vice-versa. the lending rate is very high in the comparison of deposit rate. the spread rate is quite high than the international standard. Despite of the falling interest rates over the study period. twenty five commercial banks are operating along with fifty nine development banks and seventy nine finance companies. Simultaneously. In overall. Now. However.
. higher the lending volume and vice-versa. the total outstanding credit also depicts the encouraging growth. The interest rate on the deposits (both on saving and time deposits) is still very low. Therefore the deposited money is yielding the net negative interest rate for the depositors. the inflation level is around 8% and the interest given on the deposits is far less than the inflation rater. However. we can see that the spread rate is even above than the 6% in the case of Nepal. lower the lending rate. perfectly competitive environment in the market is yet to be realized. 3. It is not the good symptoms for the economy. large chunk of population is still deprived of from those services and proper attention should be paid to deal with the problem. it used to be 5%-6%. And. 2. our economy is not following the globally accepted trend i. this phenomenon could not be sustainable in the long term. the increasing inflow of remittances is causing the rise on the deposit mobilization instead of the healthy domestic economic activities. However. the deposit mobilization seems gradually rising. Here. The major objectives of the liberalization policy are to maintain the level of interest rate by the interaction of various market forces. from the various tables we mentioned in chapter 5. higher the deposit rate. It means. However.access to modern banking services to the more population ever before. Therefore. In the developed nation.
5. following recommendations are made. Basically costumers are found keeping their money for protection purpose rather and they are not found so much interested on the interest rate given by the bank. the real competitive phenomenon is yet to be realized. the costumers have not properly chosen the appropriate financial institutions which give the higher rate of interest on deposits. no. However. In the market. Now there are sufficient numbers of financial institutions in the market which are sufficient to create the completely competitive market.3 Recommendations As. The role of NRB is not seemed effective as need to foster the competitive environment in then market. Therefore. Secondly.4. it is found that that our economy is still a dual economy and major portion of the rural economy is yet to be integrated into the mainstream of the economy.
5. Basically two factors are playing with this phenomenon. per the conclusions drawn from the empirical analysis of spread rate and interest rate structure in Nepal. the millions dollars question is that whether we are capable to utilize whole our depositing capacity or not. Costumers education is also playing big role in the market to have low level of deposit rate. the immediate need of the policy
. the figures and scenarios could be far different than before. However. our economy is still a dual economy and still a large chunk of rural population is non-integrated in the main stream of the national economy. The answer is very obvious. the open boarder with India is causing the easy way of capital flight from Nepal to India and the poor law implementation mechanism is fueling on the capital flight phenomenon. the level of deposit collection is encouraging. As we see in this study. The first one. On the course of this study. 6. 1. If we do so. 7.
The central bank and the government should take appropriate measures to foster the competitive environment in the market. 2. it uses to be around 5%-6%. it is found that the depositors are depositing their money in those institutions having lower interest rate instead of those institutions of higher interest rate. However. Now there are twenty five commercial banks. In the developed nation. it is still above than 6%. Basically it would raise the investment cost and create the adverse impact on the investment process. And other many are on the pipe line to come. 6. Despite of the large numbers of the financial institutions. Therefore. 3. the depositors should be aware themselves. 4.
. The role of Nepal Rastra Bank should be widened and must be made effective ever before to maintain the financial discipline in the market. The costumers themselves seem very unaware about the deposit rate.makers and the government is yet to formulate the appropriate policy to integrate the rural economy to main stream of the national economy. the lending rate should be maintained on the reasonable level. the modern banking service should be widened to the rural parts which may play vital role to reduce the unnecessarily high interest rate and spread rate. In many cases. 5. It indicates the high level of inefficiency in the market. in case of Nepal. The higher level of lending rate also has very negative impact on the lending process. Appropriate measures should be adopted to check this unfair practice. In developing nations. fifty nine development banks and seventy nine finance companies in the market. To maintain the reasonable interest rate. the real competitive environment in deposit rates and lending rates is yet to be realized. the spread rate use to be 2%-3%. For this.
7. It could be obviously understood that only the liberalization policy could not make the market more efficient. The government and NRB still need to play the effective role to guide the market in the desirable path.
2037.2 10491.2 4116.5 12031 13211.4 7084.5 296.5 24943.3 27333.6 10526.Money Supply M1 In Millions Rupees Total Year 1 120. 9 90875.7 4035.9 802.6 20.1 3310. 4 24531.7 0 2579.1 93969.1 38725 4908.5 10681.2 43584.3 38252.8 51062.5 11451.7 753 0 3824.8 83515. 7 73557. 6 Currency Held Hed by by the the Banks Govt 1-2-3 2 3 5.3 9718.1 18836.3 3737.2 0 0 0 0 0 0 0 0 0 0 0 0 0 Held by the Public 4 109.7 10.0 38460.7 114388.3 0 808.7 971.9 48295.6
.4 18285.4 60979.9 240 141.9 77155.2 4773 68784.5 7135.4 916.6 36462.3 28109.6 50.3 56885. 5 27492.7 6.1 23395.4 0 298.7 31421.4
1960 1965 1970 1975 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
9 174.2 163 328.1 6833.1 4283. 8 30171 33782.9 30750.2 Total Demand Deposits Held Held Held by by the by the the Govt Banks Public 5-6-7 6 7 8 61.3 Money Supply 4+8
5 137 278.4 36498.7 150 314 70 231.6 2600. 5 67502.0 14223.7 1522.3 43174.6 77926.7 20515.7 2830.6 11126.9 55658.9 83754.8 21497.3 45163.3 531. 2 61608.1 446.8 7359.9 17626.0 32985.9 64.3 59857.3 1337.5 20777.8 71504.6 2446.4 34984.5 1031.4 5480.1 16253.1 52198.4 25046.3 315.2 3122.7 30893.7 48 0 109.6 14270.8 70576.6 22493.7
5908.4 16443.8 63281.6 100205.2 1908.2 7.1 2889.9 56447. 9 38294.1 3507 42143 32048.3 12 16.2 24952.5 10.6 9388.1 0 857.2 2837.7 1742.7 4723. 7 45650 52412 60657.6 126690.4 615.6 4504.8 22281.3 763.5 23489.6 26868.5 1799.6 568.4 117. 1 83834.6 16078.8 0 0 0 0 0 0 0 0 461.5 421.
5 1595.5 543.8 2543.4 1176.3 60.4 2609.9 1980 75.0 577.7 2127.5 596.4 4398.5 579.4 8807.8 714.7 34.4 205.0 6463. 4 13033.8 21.0 1938.3 652.9 4152.8 354.2 198.Appendix 2 Current Deposits: A Sectoral Classification In Millions Rupees Year Foreig Town Financi Govern n District al ment Deposi s and Instituti Corporat ts VDCs ons ions and MidCompan Mont ies h 1 2 3 4 1975 98.2 1926.8 3943.7 3699.2 308.9 4901.2 657.9 2103.0 3925.1 2. 2 37386.6 3217.8 1045.7 2601.6 4517.7 8 183.3 4973.8 214.3 54.8 10.1 3953.8 115. 6 20638.2 1446.8 5116.7 1533.2 521.4 311. 3 16547.2 1768.7 1053.4 903.2 73.5 23.9 1866.0 563. 0 13350.4
NonIndivi profit duals Organi zations 7 14.1 820.0 57.2 922.4 4813.2 467.4
10 446.9 1530.8
Comm ercial Banks (Inter Banks) 6 7.7 6880.5 5446.3 3374.9 330.4 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2962. 7
.3 706.2 705.1 2055.2 7749.2 79.4 5650.7 8825.5 1544.2 2339.2 62.4 5114.9 156.5 3546.6 134.4 1681.9 24.5 471.0 1990 665.6 1342.8 273.4 3122.2 1598.4 875. 1 25100.7 538.9 1285.8 3741.8 5310. 7 24352.7 5111.1 488.0 877.2 716.1 51.3
NonGovt compani es and Corporat ions 5 30.4 3580.5 1472.5 3808.0 4532.3 4501.8 11006.3 3456.8 666.2 4778.5 1985 233.3 1995 2661.8 1381.4 827.5 603.4 594.9 34.5 118.9 6052.3 1980.6 1386.9 150.0 30.0 434. 8 17612.0 1313.7 1389.9 4351.0 7600.7 3091.8 12673. 4
9 4.2 2893. 2 28862.5 4591.2 4684.0 4458.2 1731.2 4314.9 4980. 4 45031.9 138.8 2060.0 1063.3 2431.1 1274.9 105. 6 33755.4 988.3 141.2 12133.2 891.3 6131.1 1874.4 4114. 2 34663.9 957.8 3865.1 2995.2 12.1 518.
2 1000.3 8 20.0 15.9 299.3 3385.7 7.8 1127.Appendix 3
Saving Deposits In Millions Year (MidJuly) Foreig n Depos its 1 0.8 1848.4 21180.0 98.5 44507.7 357.1 775. 1 130013.8 551.7 180.7 2026.2 22765.7 217.5 197.5 29783.3 2339.3 1195.9 2939.3 1.9 25889.5 2.8 2241. 4
8 2. Distric t and VDCs 2 0.6 85004.4 16.9 458.1 0.0 3159.9 Financ ial Institut ions 3 2.7 984.3 28.7 3833.8 574.0 558 1736.7 2030.6 4.2 5218.8 697.6 Individu als Others Total
1975 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
7 163.5 487.0 1833.3 135.7 1778.9 72066.0
9 172.8 3529.3 154.9 97931.1 Governme nt Corporatio ns and companies 4 2 1.9 72913.3 689.7 853.1 4971.6 0.7 83817.4 2387.6 10.4 0.2 2284.2 1776.0 33.3 925.7 26821.0 4983.0 0.8 2898. 6 128148.1 1.7 565.0 91.9 6831.0 0.9 Non-govt Corporatio ns and Companie s 5 1.3 50140.7 571.6 80987.0 6609. 1 152920. 9
6095.3 12.3 790.2 2475.6 50.7 97236. 3 174633.2 1145. 5 151573.3 4347.4 709.4 25.0 12.8 895.4 540.8 362.5 811.9 1414.0 10.4 1417.7 6313.4 33021.1 25.5 2787.3 667.9
.1 Town.3 917.8 65703.8 23935.8 2041.2 606.5 358.9 110446.7 158.5 1930.0 264.8 59771.0 191.0 5.6 3773.6 0.9 4368.5 762.7 1658.3 36885.7 811.9 0.3 717.0 5934.9 4635.7 2.1 80.7 219.8 1764.3 114106.4 1.5 72.6 Nonprofit Organiz ations 6 0.9 145.3 0.1 49.9 83.4 1073.0 731.4 1381.
4 114032.9 1555.3 1845.4 116.6 7088.0 2154.3
322. 140.6 840.2 307.6 12.4 Non-govt Corporatio ns and Companie s 4.9 9.6 9994.9 4693.5 491.3 10.5 31.7 3976.7 4942.8 1999.1 6742.7 14560.4 9.8 0.6 26054.6 15045.4 11134.1 55720.1
103. Distric t and VDCs Financ ial Institut ions Governme nt Corporatio ns and companies 10.8 15617.8 3811.2 120.1 1704.8 2445. 3 49598.4 99475.8 5433.2 73488.4 82268.8 65.5 2438.8 74373.8 86.0 7337. 4 17834.0 0.1 211.7 416.6 7930.8 12029.8 1255.2 7313.8 3278.6 18378.3 536.2 9508.2 9592.6 1689. 115.5 23147.4 1814.7 75348.8 10014.6 Nonprofit Organiz ations Individu als Others Total
1975 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
0.0 15842.8 5700. 162.2 0. 0 36389.5 147.2 66596.0 10784.2 5514.4 20111.6 12915.4 88. 3 15795.3 5 16817.4 3702.7
5231.0 1653. 5
.0 3173.7 11761.4 1496.8 244.9 95100.8 178.5 24811.1 3167.3 27971.0 332.3 84137. 5 26043.1 7373.5 9047.1 79. 5 19913.8 30157. 8
1.3 31.1 3360.6 9311. 8 40178.8 4275.1 11.6 729.7 387.3 31.9 9 14562.6 3544. 2 32252.2 23490.8 1747.6 18525.7 4004.2 31.8 7698.8 4738.3 642.Appendix 4
Fixed Deposits In Millions Year (MidJuly) Foreig n Depos its Town.4 1906.3 4363.1 1000.5 2256.2 71.7 2411.2 1563.5 2679.1 3429.9 114.3 298.9 1207.6 13.0 617.3 14.7 3
74.4 321.8 47303.7
0.4 2175.6 1385.8 23.0 3630.0 22510.2 56960.9 7054.5 6040.1 36976. 1 14078.6 1908.
647.6 33.75 5.7 231.573.633.) 71.8 65.848.543.663.1 25.547.5 7.25 9 9 8.7 24.5 4 4 6.817. 1 288.75 9 9 9 Saving Deposit Level (Million in Rs.548.6 120.862.7 114.1
.100.037.4 83.6 20.6 80.373.137.8 17.75 3 2.082.2 34.323.687.1 198.303.236.2 28.987.814.8 112.2 66.754.5 99.960.2 73. 6 248.244. 5 151.577.453.) Fixed Current Total Total Outstanding Commercial Credit (Million in Rs.75 5.129. 5
16. 6 231.885.4 114.3 50.098.7 83.612. 3 124. 6 201.031.75 Upper Limit 8.7 97.4 99.5 137.352.638.2 56. 9
47. 6 153.5 3.Appendix 5 Interest Spread % Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Lower Limit 188.8.131.523.1
36.7 75.8 74.080.2 37.696.736. 1 333698.268. 2 182.75 5.032.2 84.475.386.5 8.662.6 114. 3 174. 1 130.7
100.4 45.75 8.488.9 159.3 84.013.755.860.435. 9 179.
514 10.758 4-7.47 6.5 9 -
8.77 6-8.5 12-14 6.75 67.513.513 411.75 4.758.2510.25 11-17 1415.05 8.25 2.25 3-12
5.755.259. Nepal Rastra Bank Refinance Rate NRB Bond C.8 913.2513.5 -
2-5.55.5 2.5 8-14 6.35 310.5-6.515.513 36.5 -
3.98 7-13 3-8
1.5 7. Commercial Banks 1. Lending Rates Industry Agriculture Export Bills Commercial Loans Over Draft
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
4.5 8-14 614.516 10-17
2-4 2-184.108.40.206 10.56.5 2.5 10-16
8-13.5 910.75 5.25 3-12
2.512 7.5-4 1.5
4-6 56.5 6-8 7.513.515.5 10-18
2-5 2.5-4 2.5-14.518 14.5 7-15 12.25 3-8
2.25 2.5-6 3-7 3.512 13.5 7.55.515 916.54.5 2.55.513 3-8
3.255 2.5 712.255 2.5 914.25 6-8.754.5 7.514.75-4.5 1214.97 8.5 4-6.758 5-8 6-8.5 9.5-6
1.5 813.5 2.75 4.5 36.5-4 1.5-6 3.6 8.56.5 714.5 3-6.515 11-17 10-19
4-6.257.56.258.5 2.25-5 2.4 913.5 412.5 -
3.755 1.5 10-13 4-12 8-14 514.5 12.5-7 3.257.516 13.520
.5 10.25 -
6.Appendix 6 (Percent per Annum) Types A.5-6. Deposit Rates Saving Deposit Time Deposits 3 Months 6 Months 1 Year 2 Years and Above 2.75 3-6
1.25 310.5-6 3.5 7-16 10-18
2.5 9.514.5-13 5-11. Certificates Development Bond B.5 7.516 11-17
2. Government Securities Treasury Bills National Sa.78 813.5 9.75 1.513.58.5 -
3.513 511.75 -
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