Nepal Rastra Bank Removes Interest Rate Discount on Insurance Company Deposits

Nepal Rastra Bank (NRB), Nepal's central bank, has eliminated the policy that required life insurance companies and other institutional depositors to accept fixed deposit interest rates 1 percentage point lower than those offered to individual depositors. This policy change was announced in the first quarter monetary policy review for the fiscal year 2083. As insurance companies traditionally invest up to 80% of their funds in fixed deposits, this revision allows them to earn interest income equivalent to that of the general public, enhancing their investment returns. Previously, institutional fixed deposits were mandated to carry a minimum interest rate 1 percentage point lower than individual fixed deposits, a rule introduced when deposit interest rates were higher (above 6%). With recent interest rates declining below 5%, insurers were forced to settle for significantly lower yields on their deposits, sometimes as low as 2 to 2.5%. This new regulation removes that disparity, potentially improving the profitability of life insurers by increasing interest earnings on their investments. The move also addresses challenges faced by insurance companies as banks and financial institutions have increasingly been reluctant to renew maturing fixed deposits due to sufficient liquidity in the banking sector. By equalizing rates for institutional and individual deposits, insurance providers may have more leverage and opportunities for negotiating deposit terms, influencing their asset management strategies. As of mid-October last year, insurance companies had deposited approximately Rs 687.96 billion in banks and financial institutions in Nepal. The reform aligns with a broader trend to adjust monetary policies to changing interest rate environments and institutional needs. It reflects evolving regulatory considerations intended to sustain the insurance sector’s financial stability and support its investment activities. This adjustment in fixed deposit interest rate policy has implications for insurance companies' revenue streams, asset-liability management, and the overall investment climate in Nepal's financial sector. Regulators and market participants will likely monitor the impact on insurers' performance and banking sector dynamics in the coming months.