What it is
A bank borrows at one rate and lends at a higher one. The difference is the spread. If deposits cost 6% on average and loans earn 10%, the spread is 4 percentage points.
The spread is the bank's margin in percentage terms; net interest income is the same thing in rupees.
In Nepal the spread is capped. NRB cut the ceiling for commercial banks from 4.4% to 4% in the first-quarter review of FY 2079/80 (November 2022), and for development banks and finance companies from 5% to 4.6%. NRB has fined institutions for breaching it.
How it is calculated
Interest spread (percentage points) = Weighted average lending rate − Weighted average deposit rate, computed by NRB's prescribed method.
Worked on Nabil Bank Limited, FY 2082/83 Q4
NABIL's interest rate spread was 3.18 percentage points at the end of FY 2082/83 Q4, within NRB's 4% ceiling for commercial banks. Its net interest income was Rs 1,700.93 crore.
What good looks like
Because of the cap, most commercial banks sit close to 4%. A spread well below the cap can mean competition or a deliberate push for market share. Neutral in itself; read it with cost of funds.
Watch out
- The spread is a regulated number; it cannot show how 'profitable' one bank is versus another the way an unregulated margin would.
- NRB's calculation method (which rates and weights) is specific; a simple subtraction from the income statement will not match.
- The cap has changed several times; check the current directive before quoting it.
In Nepal
Interest spread ceilings: 4.0% for commercial banks (cut from 4.4% in the first-quarter review of Monetary Policy FY 2079/80, Nov 2022); 4.6% for development banks and finance companies (cut from 5%), confirmed in the Unified Directives 2080 cited in a 2024 NRB penalty on a development bank. The spread is reported in the quarterly ratio schedule.
Questions
To keep loans affordable and stop banks from paying depositors too little while charging borrowers too much.
Within the cap, a wider spread means more margin. But all commercial banks face the same 4% limit, so differences are small.