Private sector loan demand stagnant in Nepal’s recession-hit economy

KATHMANDU: Banks in Nepal have accumulated approximately 6 trillion rupees by the end of the current financial year, according to government data. This amount includes around 5.5 trillion rupees available for loans and 1.5 trillion rupees in excess liquidity.

The increased deposits have resulted in around 6 billion rupees being accumulated in banks and financial institutions. As a result, there is now more than enough money in the financial system to provide loans to all banks and financial institutions in the upcoming financial year.

The growth rate of loan disbursement has been low compared to the increase in deposits, leading to the surplus. The current financial year saw a growth rate of 11.18 percent for deposits and 2.91 percent for loans.

Due to the economic recession, credit demand remained low while remittances and government expenditure contributed to the growth in bank deposits.

Considering recent credit growth, the target of economic growth set in the budget, and the credit expansion target of the National Bank, an estimated 4 to 5 trillion rupees will be required for credit expansion to the private sector in the next financial year.

Experts suggest that since the necessary funds have been deposited in banks, there will be no liquidity pressure on banks. However, the main concern lies in whether industrialists will demand loans or not. To boost loan demand, the government should implement policies that increase private sector confidence, especially for expanding new and existing businesses.

Experts also recommend that the Rashtra Bank, considering the current deficit in the state’s current account, should adopt a balanced approach in monetary policy instead of being overly liberal.

They suggest introducing a policy in the upcoming fiscal year that provides loans at very low interest rates to small and medium-sized enterprises (SMEs), agriculture, industry, tourism, and other productive sectors.

In the previous fiscal year, banks and financial institutions collected deposits of 4 trillion 19 billion rupees while disbursing loans of 5 trillion 39 billion rupees. The last six months of the year saw a strict loan expansion policy due to aggressive lending in the first half, resulting in only 33 billion rupees being disbursed in the latter half.

As of the latest data, the average loan to deposit (CD) ratio of banks is 81.62 percent, which can be maintained up to 90 percent according to the National Bank’s instructions.

With total bank deposits reaching 57 trillion 40 billion rupees, banks have approximately 5 trillion rupees available for loans. It is expected that the investable amount will further increase by the end of the financial year as more deposits are made.

Although the liquidity situation has been easy in the current financial year, there is a lack of loan demand due to the state of the economy. The head of the research department at Rashtra Bank expects the liquidity situation to ease further, but the loan demand is unlikely to be significant.

On a monthly basis, deposits have increased in most months while loans have decreased in four months. However, the growth rate of deposits is approximately 11 percent, whereas loans have only grown by about 2.91 percent.

Banks have the provision to count the amount collected through bonds and from the accounts of local levels as deposits. Even if these provisions are removed, it will not significantly affect the liquidity of banks.

The private sector’s demand for loans does not seem to be increasing at the beginning of the new financial year due to the recession in the domestic economy.

Experts suggest that the National Bank should introduce a liberal monetary policy when the external indicators of the economy are positive and the liquidity situation is easy to boost private sector self-reliance.

With the removal of control on interest rates, commercial banks are now free to determine their own interest rates for deposits.

The Bankers’ Association made this decision due to accusations that interest rates could not be reduced because of syndicated banks. There is now speculation that loan interest rates may decrease in the coming months due to the liquidity situation and National Bank policies.