DETERMINANTS OF INTEREST RATE SPREAD IN NEPALESE COMMERCIAL BANKS

Abstract

Interest rates play a crucial role in the lending decisions of commercial banks. These banks operate independently and establish their own lending rates. The interest rate on a loan is the percentage of the loan amount that the bank charges for lending money. When banks lend money to customers, they charge interest for various reasons, including preserving value, compensating for risk, and generating profits, among others. The major objectives of this research are to investigate the key determinants of interest rate spread in Nepalese commercial banks, to determine the relationship between operating cost, credit risk, liquidity risk, bank size, inflation, and GDP with interest rate spread, to analyze the effect of operating cost, credit risk, liquidity risk, bank size, inflation, and GDP on interest rate spread and to identify the most explanatory variables to determine the interest rate spread. The study has also used causal comparative research design which is an attempt to identify a relationship between an independent and dependent variable. The descriptive research design has been adopted for fact-finding and adequate information gathering about the fundamental issues associated with variables determinants of interest rate spread in Nepalese commercial banks. The study is based on the secondary data which are gathered for 12 commercial banks in Nepal for the period of 10 years from 2012/13 to 2021/22. The variables used in this study are dependent variables (interest spread rate) and independent variables (bank size, operating cost, liquidity, credit risk, inflation, and GDP). With basis of financial tools, this study has analyzed through statistical tools via mean, standard deviation and coefficient of variance. The study's findings confirmed a positive correlation between the value of credit risk, operating risk, and market risk and the interest rate spread (IRS) of commercial banks in Nepal. This suggests that commercial banks will have a wider spread of interest rates when interest rates are higher. This results concluded that liquidity risk, credit risk, and operating cost ware found positive and significant determinants of interest rate spread in Nepalese commercial banks. The macroeconomic variables gross domestic products growth rate and inflation and bank specific variable bank size have not effective roles plays to determine interest rate spread. The result concluded that the bank specific factors likes non-performing loan to total loan, total bank’s assets, operating cost to total assets, liquidity assets to total assets and micro economic factors likes inflation and gross xi domestic product ware found significant positive impact on interest rate spread. It is shown that operating cost has higher influence on interest rate spread because without managing the operating cost, interest rate spread cannot be reducing. Other variables like liquidity and credit ratio are also higher influence than other variables likes bank size, inflation, and GDP ratio. Thus, it can be concluded that Bank size, operating risk, Liquidity risk, Credit risk, Inflation, and GDP have impact on interest rate spread in Nepalese commercial banks.