Chapter 6 · Part 6 — Base Rate and Spread
Base Rate and Spread
What a bank charges, what it keeps, and how to read the shape of a distribution that stops abruptly.
Two columns, both monthly averages, and together they describe the entire economics of lending. Base rate is the floor under what the bank charges. Spread is what it keeps between what it pays and what it earns. Almost every argument about bank profitability in Nepal is really an argument about these two numbers.
Base rate — the floor, not the price
Base rate is the bank's own cost of doing business, computed to a formula NRB prescribes so that every bank computes it the same way. It is not a market rate and it is not the rate any customer pays.
THE BASE RATE, IN CONCEPT [R]
(the components; the exact formula and any adjustments
are prescribed by directive)
┌───────────────────────────────────────────────────────┐
│ │
│ Cost of funds │
│ what the bank pays depositors and lenders │
│ + │
│ Cost of the statutory requirements │
│ CRR and SLR assets earn little or nothing, │
│ but must be funded — that cost is real │
│ + │
│ Operating cost │
│ staff, branches, technology, compliance │
│ + │
│ A prescribed return on assets component │
│ = │
│ ═══════════════════ │
│ BASE RATE │
│ ═══════════════════ │
│ │
└───────────────────────────────────────────────────────┘
Every loan is then priced at:
Base rate + a premium for THIS borrower's risk
The bank may not lend below its base rate. [R]That last line is the point of the whole apparatus. Before base rate existed, a bank could win a large corporate client by lending below its own cost and recovering the loss from small borrowers who had no alternative. The base rate makes the floor visible, uniform and enforceable.
Consequence for reading the sheet:
The base rate spectrum
BASE RATE — commercial banks, Chaitra end 2082 (monthly average)
4.0% ┤
│ RBB 4.21 ← cheapest funding in the system
│ Nabil 4.58 Everest 4.48 ADBL 5.01
4.5% ┤ NIMB 4.68 Nepal Bank 4.71 SCB 4.37
│
5.0% ┼──────────── system 5.01 ───────────────────
│ Global IME 4.91 Sanima 5.11 Machhapuchhre 5.14
│ Prabhu 5.14 NMB 5.23 Siddhartha 5.24
│ Citizens 5.27 Prime 5.27 Laxmi Sunrise 5.20
5.5% ┤ Kumari 5.35 Himalayan 5.46 Nepal SBI 5.40
│
6.0% ┤
│ NIC Asia 6.20 ← most expensive
6.5% ┤
Range: 4.21% to 6.20% — nearly two full percentage points.Two percentage points is an enormous competitive gap in lending. A borrower who can access RBB at base 4.21% and is quoted NIC Asia's 6.20% base is looking at roughly a 47% difference in the floor price of credit before any risk premium.
Why is RBB cheapest? It is a large state-owned bank with an enormous, sticky, low-cost deposit base (Rs 601,181 million of deposits, second largest on the sheet) — and the cost of funds is the largest single component of base rate. Why is NIC Asia dearest? Look back at Day 5: it has been through a severe credit cycle, and the cost of that shows up in operating cost and in the funding it has had to attract.
BASE RATE AND THE REST OF THE SHEET ARE CONNECTED
NIC Asia: base rate 6.20% (highest)
NPL 8.85% (highest)
CCAR 6.48% (lowest)
RBB: base rate 4.21% (lowest)
NPL 4.48% (below system)
deposits 601,181 m (2nd largest, state-backed)
The columns are not independent. Credit losses raise the cost
of doing business, which raises the base rate, which makes the
bank less competitive for the good borrowers — who are exactly
the ones it needs to fix the loan book.
┌──────────────────┐
│ credit losses │
└────────┬─────────┘
▼
┌──────────────────┐
│ higher costs │
└────────┬─────────┘
▼
┌──────────────────┐
│ higher base rate │
└────────┬─────────┘
▼
┌──────────────────┐
│ loses the best │
│ borrowers │
└────────┬─────────┘
│
└──────────► back to the top
This loop is why a damaged bank stays damaged for years.Spread — what the bank keeps
Spread is, in essence, the difference between the average rate a bank earns on its lending and the average rate it pays on its deposits, computed to a prescribed method and averaged monthly. [R]
┌───────────────────────────────────────────────────────┐
│ │
│ SPREAD ≈ average lending rate │
│ − average deposit rate │
│ │
│ (prescribed method; monthly average) [R] │
│ │
└───────────────────────────────────────────────────────┘
WHERE THE MONEY GOES
Lending rate ████████████████████████████ say 9.0%
│ │
│ SPREAD 3.37% │
│ │
Deposit rate ████████████████ say 5.6%
└────────┬───────────────┘
│
out of the spread the bank must pay:
operating cost
loan loss provisions
tax
│
▼
what is left is
shareholder profitThe spread is not profit. It is gross margin, out of which every cost of running the bank must come. A bank with a 3.4% spread and a 1.5% cost of operations and a 1.0% provisioning charge is not making 3.4%.
The spread column, and what it tells you
SPREAD — commercial banks, Chaitra end 2082 (monthly average) Prime Commercial 3.79 ████████████████████████████████ Siddhartha 3.71 ███████████████████████████████ SCB 3.67 ██████████████████████████████ Citizens 3.55 █████████████████████████████ Machhapuchhre 3.53 █████████████████████████████ NMB 3.50 ████████████████████████████ Sanima 3.48 ████████████████████████████ ADBL 3.47 ████████████████████████████ Prabhu 3.44 ███████████████████████████ RBB 3.44 ███████████████████████████ NIC Asia 3.40 ███████████████████████████ Laxmi Sunrise 3.40 ███████████████████████████ ─────────── system 3.37 ────────────────────────────── Nepal Bank 3.70 ██████████████████████████████ Nepal SBI 3.31 ██████████████████████████ Nabil 3.31 ██████████████████████████ Global IME 3.30 ██████████████████████████ Kumari 3.13 █████████████████████████ Everest 3.12 ████████████████████████ Himalayan 2.84 ██████████████████████ NIMB 2.79 ██████████████████████ Range: 2.79% to 3.79% — exactly one percentage point, and NOT ONE bank exceeds 3.79%.
That last observation is the interesting one. Base rate varies by two full points across the system; spread varies by one, and the top of the range is a hard-looking edge rather than a tail.
TWO DISTRIBUTIONS, VERY DIFFERENT SHAPES BASE RATE SPREAD 4.21 ─────────────── 6.20 2.79 ────── 3.79 │ │ │ │ spread out, no cluster tight, and it STOPS A distribution that stops abruptly at the top is the signature of a BINDING CONSTRAINT, not of competition. [R]
The Class "C" sheet shows the same shape at a different level:
FINANCE COMPANIES — base rate and spread, Chaitra end 2082 company base rate spread ──────────────────────────────────────────────── Janaki Finance 9.71 4.60 Samriddhi Finance 9.10 4.58 Multipurpose Finance 8.35 4.58 Best Finance 8.53 4.19 Nepal Finance 8.08 4.57 Progressive Finance 7.57 4.46 Pokhara Finance 7.55 3.84 Reliance Finance 7.36 4.28 Goodwill Finance 6.97 4.06 Shree Investment 6.97 3.78 Central Finance 6.91 4.41 Gorkhas Finance 6.70 4.53 Guheshwori Merchant 6.58 4.59 ICFC Finance 6.24 4.48 Manjushree Finance 5.72 4.59 ──────────────────────────────────────────────── Total 6.91 4.38 Class C base rates run 6.91% against the banks' 5.01% — nearly two points more expensive to borrow from. Class C spreads run 4.38% against the banks' 3.37% — a full point wider, and again bunched at the top.
Finance companies pay more for deposits (they must, to attract them away from banks), so they charge more, and they are permitted a wider spread. [R] Both sheets show the same pattern: a tight cluster pressed against the upper edge.
Worked example — turning spread into rupees
Illustrative arithmetic on published figures.
WHAT ONE PERCENTAGE POINT OF SPREAD IS WORTH
Take Global IME, the largest lender on the sheet.
Total loan Rs 474,544 m
Spread 3.30%
Gross interest margin, roughly:
474,544 × 0.0330 = Rs 15,660 m per year
Now suppose the spread moved to the system's 3.37%:
474,544 × 0.0337 = Rs 15,992 m
────────────
Difference from 7 basis points Rs 332 m
Seven hundredths of one percent, on this balance sheet,
is Rs 332 million a year.And the reverse — what a compression costs:
A 25 BASIS POINT SPREAD COMPRESSION ACROSS THE SYSTEM
System loans Rs 5,253,193 m
25 bp = 0.0025
5,253,193 × 0.0025 = Rs 13,133 m of gross margin,
system-wide, per year.
For scale, system core capital is Rs 608,991 m.
A 25 bp compression removes gross margin equal to
about 2.2% of the entire system's core capital,
every year, before any costs.This is why spread regulation is one of the most consequential levers NRB has, and why every change to it moves bank share prices.
Reading base rate and spread together
Four combinations, four different businesses:
┌──────────────────┬────────────────────┬────────────────────┐ │ │ LOW SPREAD │ HIGH SPREAD │ ├──────────────────┼────────────────────┼────────────────────┤ │ │ Competing hard │ Cheap funding AND │ │ LOW │ on price. Volume │ wide margin — │ │ BASE RATE │ business, thin │ the strongest │ │ │ margin. │ position │ │ │ NIMB 4.68 / 2.79 │ RBB 4.21 / 3.44 │ ├──────────────────┼────────────────────┼────────────────────┤ │ │ Expensive AND │ Expensive but │ │ HIGH │ thin — the │ holding margin. │ │ BASE RATE │ hardest place │ Usually lending │ │ │ to be │ to riskier │ │ │ Himalayan │ borrowers. │ │ │ 5.46 / 2.84 │ NIC Asia │ │ │ │ 6.20 / 3.40 │ └──────────────────┴────────────────────┴────────────────────┘
Himalayan Bank at base 5.46% with spread 2.84% is worth pausing on: it is funding expensively and keeping the second-narrowest margin in the system, while carrying 7.98% NPL and the lowest CAR (11.26%). Four columns, one consistent story. That is what reading the sheet across, rather than down, gives you.
Formulas from today
Base rate = cost of funds
+ cost of CRR/SLR
+ operating cost
+ prescribed return component [R]
Loan price = base rate + borrower risk premium
(may not go below base rate) [R]
Spread ≈ average lending rate − average deposit rate
(prescribed method, monthly average) [R]
Gross interest margin ≈ Total Loan × Spread
Value of n basis points = Total Loan × n ÷ 10,000What you should be able to do now
- Explain what base rate is composed of and why a bank may not lend below it.
- Say why a low base rate is a competitive weapon, and trace the feedback loop that keeps a damaged bank's base rate high.
- Explain why spread is gross margin and not profit.
- Recognise the signature of a binding cap in the shape of a distribution.
- Convert spread into rupees on a loan book, and size a basis-point change.
- Read base rate and spread as a two-by-two and place a bank in it.
Tomorrow: directed lending, then the whole week assembled into a single screen across all thirty-five institutions.
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