Bank loans witness significant decrease of more than Rs 400 bn as demand plummets

KATHMANDU: Amid sufficient funds and a conducive environment for loans, banks and financial institutions are now shying away from easy loan extensions. The continuous demand for loans, investable climate, and the willingness of banks and financial institutions are essential components of the current financial system.

Even with a steady influx of liquid assets over the past ten months, the flow of loans remained modest, confirming this observation.

From the month of Mid-July to Mid-May of the previous year, total deposits in banks and financial institutions reached 370 billion rupees, while the flow of loans amounted to only 153 billion rupees. This indicates a growth rate of 7.3% in deposits and 3.3% in loans during the said period.

The inflow of deposits during the last fiscal year amounted to 231 billion rupees, whereas loans stood at 548 billion rupees. Both figures demonstrate a decrease compared to the previous year.

The Nepal Rastra Bank’s recent data reveals that around 400 billion rupees are currently available for investment in banks and financial institutions. The Credit-Deposit Ratio (CDR) in these institutions stands at 83.92%.

According to the central bank’s directive, banks and financial institutions can maintain a maximum CDR of 90%. Hence, they can still accommodate around 403 billion rupees as additional investments. This indicates the potential for approximately 4 trillion rupees in viable loans with these banks.

Economist and former banker Parshuram Kshetri attributes the reduced demand for loans to the economic downturn, high-interest rates, a lack of investment-friendly environment, and other similar factors.

He stated that banks have not been enthusiastic about extending loans due to the economic activities of the previous fiscal year. Additionally, even with sufficient liquidity, a lack of confidence among lenders has hindered the growth of loan demand.

He emphasized that despite adequate liquidity, it is crucial to set appropriate interest rates and break away from the prevalent practice of controlling interest rates based on liquidity.

Kshetri further emphasized that even in a situation of adequate liquidity, banks must be able to set the right interest rates.

He argued that while other instruments like reverse repos offer significantly higher returns compared to the US dollar and other instruments, banks show minimal interest in them, indicating that their focus has not shifted entirely.

The favorable liquidity situation does not seem to be encouraging banks to extend many loans, said the President of the Nepal Bankers’ Association, Sunil KC.

KC also highlighted that despite the ease of liquidity, the lack of effective demand for loans has led to banks not extending significant credit.

He mentioned that the current status of liquidity is well-suited for significant investments, but the demand for loans is still not there. “The overall state of liquidity may be comfortable, but the lack of demand is preventing banks from extending substantial loans”.