Economic downturn hampers banks’ efforts despite interest rate reductions

KATHMANDU: Amid concerted efforts by commercial banks to stimulate lending through interest rate reductions, a subdued demand for loans persists, primarily attributed to low business confidence triggered by the ongoing economic slowdown.

Despite commercial banks slashing their base interest rates to as low as 7.77 percent in response to a surplus of loanable funds, the anticipated surge in demand for loans has not materialized.

Sunil KC, President of the Nepal Bankers’ Association, attributes this to a lack of confidence within the business sector, coupled with cash flow challenges arising from mounting pressure on non-performing assets.

The weighted average base rate of banks, standing at approximately 9.5 percent as of mid-January, reflects a notable decline from 10.91 percent in the corresponding period last year.

This reduction in interest rates followed the Nepal Rastra Bank’s (NRB) leniency, as observed in the first review of the monetary policy for 2023/24 in early December. The NRB lowered the bank rate from 7.5 percent to 7 percent, simultaneously revising the policy rate to 5.5 percent from 6.5 percent.

While these measures provided some relief to investors in the share market, the impact on confidence within the real estate sector remains limited.

Sunil KC notes that aggregate demand has dwindled due to a decrease in domestic consumption, coupled with a decline in the demand for imported goods, leading to a reduced need for loans. Businesspersons have reportedly shifted focus from credit transactions to cash-based dealings.

President Sunil KC anticipates a further decline in interest rates in the coming days, citing a rising deposit collection coupled with a stagnant lending scenario.

According to Nepal Rastra Bank records, the total lending of banks and financial institutions has reached Rs 5.081 trillion, reflecting a Rs 203 billion increase since mid-July 2023. In the same period, deposit collection has surged by Rs 365 billion to Rs 6.141 trillion.

Despite these figures, the prevailing economic climate continues to pose challenges to banks seeking to catalyze lending and economic revitalization.