Kathmandu – Nepal Rastra Bank (NRB), in its third quarterly review of this fiscal year’s monetary policy, has hinted that bank and financial institutions (BFIs) to prepare for interest rate hikes.

By raising the cash reserve ratio (CRR), NRB has clearly indicated that interest rates may rise. It also urged banks to boost lending instead of relying on deposit tools that don’t offer returns.

NRB wants to reduce excess liquidity and make lending more active. It believes current low interest rates aren't sustainable for long-term loan growth. Now is a good time to borrow, but depositors may soon see better returns on fixed deposits.

Loan interest rates are at a historic low of 8.22 percent, while deposit rates average just 4.45 percent . Fixed deposit rates are around 6.5 percent . With such low returns, many depositors haven’t renewed their fixed deposits. NRB fears further rate cuts could lead to capital moving out of the banking system.

To avoid this, NRB increased the CRR requirement. Banks must now keep 90 percent of CRR funds in cash, up from 70 percent. This change will mob up about Rs 55.21 billion in liquidity from the system.

Although BFIs have enough funds, they aren’t lending enough. So, NRB changed its policy to push more lending. It has already absorbed around Rs 400 billion in liquidity using deposit tools.

NRB also cut the risk weight for loans against share from 125 percent to 100 percent, which may lower banks' risk exposure. But full details will come in the upcoming integrated directive. Currently, banks have invested Rs 124 billion in share-backed loans. Loans under Rs 5 million already had a 100 percent risk weight.

NRB noted that market demand is rising. In the first nine months of the fiscal year, banks issued loans worth Rs 367 billion. Low interest rates have encouraged borrowing, boosted economic activity, and reduced bad loans.

With inflation under control, NRB aims to keep the economy stable and prevent wild interest rate swings. The latest review focuses on maintaining balanced liquidity and supporting demand.