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Acknowledgement
I would like to express my sincere gratitude to our course instructor, Mr. Satyendra Timilsina for providing this opportunity to learn the trend of interest rates in our country. I would also like to thank different websites for providing their financial information freely in the internet. I would also like to thank the faculty and the administrative staffs of Ace Institute of Management for providing me help and support during our course of enrollment. Lastly, I would like to thank my friends in class for providing me a great company.
Figure:
Figure 1: Trend Chart of Interest Rates in Nepal ......................................................................................... 7
Contents
Introduction .................................................................................................................................................. 1 Theoretical Background ............................................................................................................................ 1 Determinants of Market Interest Rates .................................................................................................... 1 The Equilibrium Interest Rate ............................................................................................................... 1 Interest Rate in Nepalese Context ................................................................................................................ 2 Pre-Interest Rate Phase (pre 1955)........................................................................................................... 2 Controlled Interest Rate Phase ................................................................................................................. 2 Transitional Interest Rate Phase ............................................................................................................... 3 Liberalized Interest Rate Phase................................................................................................................. 3 Interest Rate Trend Analysis ..................................................................................................................... 4 Impact of Interest Rate in Nepalese Economy ......................................................................................... 4 Conclusion ..................................................................................................................................................... 5 Annex ............................................................................................................................................................ 6 Tables and Charts ...................................................................................................................................... 6 References ................................................................................................................................................ 8
Introduction
Theoretical Background
When a bank or other financial institution lends money, it requires you to repay funds lend (principal), plus an additional payment called interest. Market interest rate simply refers to the rates of interest paid on deposits and other investments, determined by the interaction of the supply of and demand for funds in the money market. In other words "it is the cost of borrowing funds at the percentage of amount borrowed."(Baye & Jansen, 2000, p.73).
financial system was still rudimentary and described as "predominantly a cash-economy" (NRB, 1965); however the further effort by GON of formalizing the financial system was reflected in the establishment of i) Nepal Industrial Development Corporation (NIDC) in 19593; ii) Rastriya Banijya Bank (RBB) 19664; and iii) Agriculture Development Bank in 19685; these institutions facilitated the elimination of the dual currency system in 1967, which predominated in Nepal (NRB, 1996). In that year, NRB also adopted a controlled interest rate determination regime, where the Bank used to fix deposit and lending rates of the commercial banks. Different rates were fixed for different instruments and purpose of the loan.
development (FD) had not brought efficiency in the financial system. To address this, NRB attempted to maintain the interest rate spread of commercial banks at a desired level through using moral suasion only. Additionally, in the spirit of interest rate deregulation, the provision of interest rate spread of 5.5% was withdrawn by the NRB in 2003. Since then no such direct or indirect restriction is implied as far as determination of interest rate is concerned, although NRB has shown intermittent concern regarding interest rates.
insurgency.
b. The economic growth was stalled during the observation period. c. Low interest rates for depositor means that the banks had huge deposits whereas low
credit interests means that there was very less loan outflow. However, with the end of Maoist insurgency in the country, banks have been able to diversify their investment portfolio and hence there has been steady growth in loan disbursements. The current lending interest rate of commercial banks averages around 17 percent and the interest rate for deposits averages around 8 percent. The overall interest rate of the country has averaged around 6.40 percent from 2003 to 2013.
Conclusion
As per the observation, during the Maoist insurgency period, the country was almost in liquidity trap. But however, with the Maoist joining the mainstream politics and the end of insurgency, there has been steady increase in investment in the country which has also increased the interest rate as well. After the end of the insurgency, there has been slight increase in the deposit interest rates. Lending interest rates, however, have been stable from 2006 to 2010.
Annex
Tables and Charts
Structure of Interest Rate (Percent per Annum)
Table 1: List of Deposit and Lending Interest Rates
Year 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1994 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976 1975
Deposit 3.60 2.50 2.40 2.30 2.30 2.30 2.60 4.80 6.00 7.30 8.90 9.80 9.60 8.80 11.90 12.50 12.50 12.50 12.50 12.50 12.50 12.50 12.30 12.00 12.00 12.00 12.00 12.20 14.60 13.60
Lending 8.00 8.00 8.00 8.00 8.00 8.10 8.50 7.40 6.80 7.70 9.50 11.30 14.00 14.50 12.90 14.40 15.00 15.00 15.00 15.70 17.00 17.00 17.00 15.50 14.00 14.00 14.00 14.00 14.00 13.00 12.00
18.00 16.00 14.00 12.00 10.00 Deposit 8.00 6.00 4.00 2.00 0.00 2010 2008 2006 2004 2002 2000 1998 1996 1990 1988 1986 1984 1982 1980 1978 1976
Figure 1: Trend Chart of Interest Rates in Nepal
Lending
References
1. Tulsi Jung Basnets Blog: http://jungtulsi.blogspot.com/2008/03/interest-rate-structure-innepal.html, viewed on 29th March, 2013 2. Interest Rate Pass-through in Nepal, Nephil Matangi Maskey, Ph.D., https://docs.google.com/viewer?a=v&q=cache:iVc4jCo13JoJ:red.nrb.org.np/publications/econo mic_review/Economic_Review_(Occasional_Paper)-No_22,_April_2010%2B1_Interest_Rate_PassThrough_In_Nepal%5BNephil_Matangi_Maskey,_Ph.D,_Rajendra_Pandit%5D.pdf+interest+rate s+trend+in+nepal&hl=en&pid=bl&srcid=ADGEESgLrWU5mC_FtateUMxDa51MLVJu1kuFKatGr3aFsP66vH5_ZIvjcCBvTrEKXn3Q3dEBWVcVSrhi1kX6JwRjSCJnb39OvKeDIr-0UmeDh7F4oRb2IKLQQ5kwg6b4D_FjkNQXx&sig=AHIEtbQweNnDd0gZcBaej4rQJ6B_22MZnw 3. Trade Economics Nepal Interest Rate http://www.tradingeconomics.com/nepal/interest-rate, viewed on 29th March, 2013 4. Interest Rate Structure of Commerical Banks, Nepal Rastra Bank: http://bfr.nrb.org.np/bfrstatistics.php?tp=interest_rate_structure&&vw=15, viewed on 6th April, 2013 5. Fact Fish: http://www.factfish.com/statistic-country/nepal/lending%20interest%20rate viewed on 7th April, 2013 6. Fact Fish: http://www.factfish.com/statistic-country/nepal/deposit%20interest%20rate viewed on 7th April, 2013