Nepal Rastra Bank Removes Interest Rate Differential on Insurance Company Deposits

Nepal Rastra Bank (NRB), Nepal's central bank, has eliminated the previous monetary policy provision that required insurance companies and other institutional investors to accept a 1 percentage point lower interest rate on fixed deposits compared to the rates accessible to individual depositors. This policy change was announced in the first quarter review of the monetary policy for fiscal year 2083 (Nepali calendar). Insurance companies in Nepal have traditionally invested up to 80% of their investible funds in fixed deposits. Previously, with interest rates on fixed deposits declining to below 5%, insurance firms were compelled to accept significantly lower yields, sometimes as low as 2 to 2.5% annually on institutional fixed deposits due to the mandated one percentage point rate differential. By scrapping this requirement, insurance companies will now benefit from earning interest rates equivalent to those of individual fixed deposit holders. This adjustment allows insurers to enhance their investment income, which has direct implications for the management of premiums and overall financial stability. The NRB's earlier mandate, set in 2080 (calendar year), aimed to sustain institutional fixed deposit interest rates at least 1 percentage point below individual rates, with a minimum floor of 2%. However, as market-interest rates declined, this policy pressured insurers to accept lower returns on large portions of their investments. Moreover, there has been recent liquidity pressure in the banking sector, with banks reportedly refusing to renew maturing fixed deposits, compounding challenges for insurers in managing their fixed-income portfolios. With this policy change, insurance companies are positioned to negotiate deposits on more favorable terms, potentially reducing reinvestment risk. This regulatory update is significant for Nepal’s insurance sector's asset management strategies. It aligns institutional and retail depositor interests more closely and may influence the competitive landscape among banks seeking large institutional deposits. Insurance executives are expected to benefit from improved yields and greater flexibility in managing fixed deposit investments under current market conditions.