Base rate written in center
25 Apr, 2023

Why Base Rate is Important while Making Loan Decisions in Nepal

A base rate is the minimum interest rate below which the bank cannot lend to its customers. Banks Loans are offered by adding the base rate to a suitable spread, subject to the credit risk premium. The base rate in Nepal is decided in order to enhance transparency in the credit market and ensure that banks pass on the lower cost of funds to their customers.Factors determining the Base Rate in NepalVarious important components that typically determine the base rate set by a particular bank in Nepal includes:·   Cost of funds (interest rate provided by the bank on deposits)·

  Cost of the Cash Reserve Ratio·   Operating costs·   The minimum rate of returns·   Cost of the Statutory Liquidity RatioBase rate of two different banks may differ because of any one or more of these above-mentioned factors, with the difference in interest rates being the most common factor.How is the base rate calculated in Nepal?While calculating the base rate five factors are majorly considered, these includes the cost of deposit, the bank's administrative costs, the cost of reserve maintained by the Bank with the Central Bank, the opportunity cost of cash retained by the bank, and other fixed assets.How does it impacts loan rate of customers?Nepal Rastra Bank (NRB) issued Unified Directive on Loan Management that has a provision under which banks can fix the base rate by adding 0.75 percent profit on their cost incurred and then add certain percentage of premium rate to determine the interest rate. Even though banks' interest rates increase or decrease automatically when the base rate fluctuates every quarter, the premium rate remains constant. As per the NRB directive, all banks must clearly mention the premium rate in the offer letter of its customers. The premium rate cannot be increased later.Let's understand this with simple example:Saral Kumar took loan at 13% (i.e 10% Base rate + 3% Premium rate) on 5th Baishakh, 2079. But later on Asad both the base rate and premium rate of bank increased to 11% and 5% respectively.In this case his interest rate will increase by only 1% (i.e his current rate will be 14%) because his premium rate will remain constant for the lifetime of loan and his interest rate will change based on change in base rate.If base rate will increase his interest rate will increase and if base rate will decrease his interest rate will decrease. How Saral Banking Sewa will help you?Saral Banking Sewa enables you to choose the loan with the best rate through its Loan Comparison Feature and through its digital touch point like chat, whatsapp, viber, messenger and call. Also we help you to connect with banks for loan processing.Further, our team actively seeks ways to ‘saralify’ your banking experience. If you require assistance from us, throughout your banking processes, we’re always here for you.Contact us: WhatsApp/Viber: 9851361107 / Telephone No.: 01-5269107 If you found this Blog helpful, please share this blog with your family members and friends. If you have any feedback, please feel free to leave a comment in the section below.Connect with us for Banking updates onFacebook             Instagram