With the beginning of the new fiscal year, commercial banks have released the new and latest rate of interest. Interest rate on saving deposit remains constant and uniform as all the banks have honored the gentleman’s agreement this quarter.
As for the base rate, most banks have published a reduced base rate by the end of the fourth quarter. Base rate is the main determinant of interest rate on loan products. It is the sum of cost of funds, cost of liquidity (CRR and SLR) and cost of operations. The banks add a premium on the base rate to derive the final interest on loans. This premium is based on many factors like, credit worthiness of the customer, amount of loan etc. However, a higher base rate doesn’t always mean that the final interest on loan will also be high. On the contrary, a lower rate of premium doesn’t always mean that the final interest on loan will also be low.
The spread rate or net interest spread is the difference between average yields received from loans and advances and average rate paid on deposit products. The net interest spread is the main source of income for the banks and reflects the earning capacity of the banks.
Margin Type Loan is a loan that the commercials banks provide against shares as collateral. The banks have a different rate of premium which is added to the base rate to derive the final interest on loan for a customer. Since, the loan is issued against the shares held by the customer, the current market price of the shares is a major influencing factor in these loans. It is also affected by the perspective of the banks regarding the future performance of the shares.
For analysis, a list has been compiled containing the latest base rate, spread rate and margin lending rate of all commercial banks.
The industry average spread rate stands at 4.35% and industry average base rate stands at 9.57% by the end of the fourth quarter. Compared to the average base rate of the previous quarter, the average base rate has considerably fallen. The premium on base rate for margin lending could vary between 0% and 8% depending on the bank and the customer.
Only 10 out of 28 commercial banks have below/equal to average base rate. Citizens Bank International Limited (CZBIL) has the lowest base rate of 3.15% while Nepal Bangladesh Bank Limited (NBB) has the highest spread rate in the industry at 4.74%. However, there is not much deviation from industry average on the either side.
Similarly, only 11 commercial banks charge below average base rate in the industry. Rastriya Banijya Bank (RBB) and Standard Chartered Bank (SCB) charge the lowest base rate of 5.38% and 7.63% respectively. On the other hand, Civil Bank Limited (CBL) and Century Commercial Bank (CCBL) charge the highest base rate of 11.11% and 11.29% respectively. High deviation from industry average can be seen on the upper as well as lower end.
Although, the banks have reduced the base rate on loan products resulting in overall fall in the average base rate in the industry, ripple effects of this move is yet to be seen in the stock market. Since the stock market has been discouraged by many issues recently, it will take more than slight reduction in interest rates for investors to regain confidence.