DETERMINANTS OF LENDING INTEREST RATE NEPALESE OF COMMERCIAL BANKS

Abstract

This study's primary goal was to determine the elements that influence the interest rates that Nepalese banks charge and provide by looking at the relationship between those parameters and interest rates. The nature of this study is descriptive and causal comparative. A descriptive and causal comparative study strategy has been used to meet the goals. All 20 of the nation's listed commercial banks make up the study's population. The NRB provided a list of listed commercial banks. As of the middle of June 2024, there are twenty commercial banks in total. Using a judgmental sampling technique based on the varying sizes of the banks, four commercial banks are chosen as a sample for the study out of these twenty institutions. The operational costs to total assets ratio has a positive and statistically significant impact on the commercial bank lending rate, according to the regression models. Lending rate and profitability (ROA) have been determined to be substantially positively correlated. Furthermore, the loan interest rate is significantly and favorably impacted by default risk. Lending rate, however, doesn't seem to be a good way to explain why deposit interest rates vary. This study ultimately comes to the conclusion that, in the Nepalese environment, default risk, profitability, and the ratio of operating costs to total assets are the primary determinants of commercial banks' lending rates. The recommendations made by this study are based on the results of the empirical analysis. First off, the lending rates at the tested banks are exorbitant, which might seriously jeopardize an institution's profits and capital structure. Banks should make every effort to find a balance that would enable them to meet lending costs while also preserving positive banking relationships with their customers. It is imperative for bank management to uphold cautious lending rates in order to ensure the safety and soundness of financial institutions. Furthermore, to maintain lending rates at prudent levels consistently and continuously, bank management should make sure that the necessary policies, procedures, management information systems, and internal controls are in place. Keywords: Return on Assets, Return on Equity, Capital Adequacy Ratio, Cash Reserve Ratio, Non-Performing Loans Ratio, Bank Size