Kathmandu, July 20 It is likely that banks and financial institutions (BFIs) will not be able to lower interest rates on credit as their cost on deposits is increasing. BFIs have been offering high interest rates on fixed deposit schemes to lure depositors as deposit growth has been sluggish as compared to credit expansion in the last fiscal. According to Nepal Rastra Bank (NRB), share of fixed deposit in overall deposit collection of BFIs is rising. Share of fixed deposit in total deposit collection of BFIs rose to 43.4 per cent in first 11 months of fiscal 2016-17, as compared to 30.2 per cent of the corresponding period of the previous fiscal. However, the share of savings deposit and demand (call) deposit has been gradually coming down. Money that was deposited as savings and call deposits was transferred to fixed deposit accounts to reap the benefit of the higher interest rates. “It is beneficial for depositors as they are receiving high and competitive interest rates on deposits, however, it will hit the borrowers,” said Bhupendra Pandey, deputy CEO of state-owned Rastriya Banijya Bank (RBB). RBB, which is in a comfortable position in terms of its credit to core capital cum deposit (CCD) ratio at 65 per cent, has also raised interest rates on both deposits and credit along with the interest rate rise in the banking industry and there is no loan product that has interest rate below 10 per cent. Since remittance growth has been falling, deposit growth in BFIs depends on the government expenditure performance. If the government expenditure remains slow in this fiscal like in the previous year, the interest rate on credit will remain high throughout the year, as per Pandey. NRB allows BFIs to review the interest rate every three months based on the changes in base rate. The base rate is calculated on the basis of the expenses incurred by BFIs in deposit collection and 80 per cent of the overhead cost plus 0.75 per cent profit. BFIs are allowed to change the interest rate only when the base rate fluctuates, as per the central bank. Credit expansion of BFIs is also expected to take a hit as they have exceeded permissible CCD ratio of 80 per cent. BFIs have to maintain CCD ratio of below 80 per cent within first quarter of this fiscal. “A large chunk of deposits collected by BFIs will be utilised to maintain CCD, which is why there will be less room for credit expansion,” said Pandey. Since the BFIs will be focused on maintaining CCD ratio in the first quarter of this fiscal as per the provision of Monetary Policy 2016-17, it may affect credit expansion too. On the other hand, demand for credit may also drop due to the higher interest rates. “Only businesses that have a high rate of return will be able to borrow from BFIs if the interest rates on credit are high and it will particularly hit the expansion of small and medium enterprises,” said Shyam Prasad Giri, president of the Federation of Nepal Cottage and Small Industries.