Nepali banks are facing a decline in fixed deposit (FD) renewals as they have slashed interest rates by nearly half compared to the previous fiscal year. Depositors, who previously enjoyed high interest rates on their FDs, are now reluctant to renew their investments due to the significant reduction in returns.
Over the past year, the interest rates offered on FDs have declined by approximately 50 percent. Depositors who had initially secured FDs at 12 percent interest rates are now being asked to renew them at around 6 percent, prompting many to explore alternative investment options.
This reluctance to renew FDs has led to a decrease in the volume of fixed deposits held by banks and a corresponding rise in savings deposits. In the last Mangsir (November-December), fixed deposits accounted for 59.18 percent of total deposits in commercial banks. However, by Falgun (February-March), this percentage had fallen to 57.18 percent, representing a nearly one percent decline in the portion of FDs during that period.
While depositors have chosen not to renew their FDs, their funds have remained within the banking system, contributing to an increase in savings deposits. The share of savings deposits, which stood at 26.54 percent in Mangsir, rose to 28.28 percent by Falgun, reflecting a nearly 2 percent increase in volume over the same period.
The decline in fixed deposit renewals has had a positive impact on banks’ cost of funds. Generally, banks offer higher interest rates on FDs compared to savings accounts. As a result, lower FD renewals translate into a reduction in the overall cost of funds for banks, potentially improving their profitability margins.
The current trend highlights the evolving dynamics of Nepal’s banking sector and the sensitivity of depositors to changes in interest rates. As banks navigate the challenges posed by the interest rate environment, they may need to explore alternative investment products and strategies to retain and attract depositors while maintaining a sustainable cost structure.
