What it is
The bank pays interest to the people whose money it uses: depositors first, then debenture holders and any lenders.
This is a bank's largest expense. It rises when deposit rates rise or when the deposit mix shifts toward fixed deposits.
Interest expense ÷ average deposits and borrowings is roughly the cost of funds, one of NRB's reported ratios.
How it is calculated
Interest on deposits + interest on debentures + interest on borrowings + interest to BFIs, for the period.
Worked on Nabil Bank Limited, FY 2082/83 Q4
NABIL paid interest of Rs 2,094.61 crore in FY 2082/83 on deposits of about Rs 59,255.94 crore; its reported cost of funds was 3.09%.
What good looks like
Growing slower than interest income. A bank with many savings and current accounts pays less interest for the same deposits than one relying on fixed deposits.
Watch out
- Interest expense lags rate changes because fixed deposits reprice only at maturity.
- Debenture interest is fixed and must be paid even in a bad year.
- A deposit rate war across the sector lifts this line for everyone.
In Nepal
NRB caps the gap between what banks charge and what they pay (the interest spread). Since the first-quarter review of FY 2079/80 the cap has been 4% for commercial banks and 4.6% for development banks and finance companies.
Questions
Banks must offer higher deposit rates to keep deposits, and that extra cost shows up here.
The deposit mix differs. A bank with many low-rate savings and current accounts pays far less than one that depends on fixed deposits.