DETERMINANTS OF LENDING INTEREST RATE OF NEPALESE COMMERCIAL BANKS

Abstract

The study primarily examined the determinants of lending interest rates in Nepalese commercial banks. This study focuses on how lending interest rate is affected by deposit interest rate, lending interest rate, liquidity ratio, operating expenses ratio, profitability ratio, inflation rate and GDP growth rate. Six sample bank’s ten-year data from the years 2012/13 to 2021/22 are used in this study. With the aid of descriptive and causal research designs, data analysis is carried out. The SPSS software used for data analysis when the obtained data are provided in an orderly format. It was found that lending interest rate has positive relation with bank size, deposit interest rate, operating expenses ratio, return on assets and GDP growth rate but liquidity and inflation rate have negative relation with lending interest rate of the banks. The increase in the deposit interest rate increases the lending interest rate for the bank, since the bank transfers deposit interest rate for borrowers. Liquidity has positive effect on lending interest rate, concluding that increased liquidity shows the better short-term financial stability of the banks and banks can increase the interest rate with this strength. There is positive effect of return on assets on lending interest rate, there is positive effect of operating expenses ratio on lending interest rate and there is negative effect of inflation rate on lending interest rate. Increasing the bank’s profitability enables the bank to provide credit facilities at low interest rates, as it can compensate for this decline in lending rates through the expansion of lending. The increase in inflation contributes to the increase of the bank’s lending interest rate, as the bank seeks to maintain the same levels of real interest it charges by transferring the inflation rate for borrowers. The GDP growth rate has negative effect on lending interest rate of the banks, concluding that the growth in banking sector interest rate does not rely on economic growth of the country. Keywords: Lending Interest Rate, Bank Size, Deposit Interest Rate, Liquidity Ratio, Operating Expenses Ratio, Return on Assets, Inflation Rate and GDP Growth Rate