Nepal faces lagging loan growth despite strong deposit collection

KATHMANDU: Nepal Rastra Bank (NRB) reports substantial growth in deposits but a slower-than-expected expansion in loans for the current fiscal year. From July 2023 to May 31, 2024, deposits reached NPR 456 billion, a growth rate of 7.9%, while loans disbursed amounted to NPR 245 billion, growing only 5%. This falls short of the NRB’s 11.5% credit expansion target for the year.

Despite early expectations of increased loan demand due to improved external economic indicators, falling interest rates, and ample liquidity, the credit flow has not met expectations. Banking expert Parshuram Kunwar Chhetri attributes this to the economic downturn affecting market demand and commercial activities. He noted that banks and financial institutions had more than NPR 6 billion in investable funds as of last Friday, with an average loan-deposit ratio of 80.08%, well below the permissible 90%.

Chhetri explained that bad loans have increased recently, pressuring banks’ capital funds and reducing their lending capacity despite sufficient liquidity. “Economic laxity, not issues like interest rates or price increases, is the main reason for the stagnation in loan demand,” he said.

Although some banks face capital fund pressures, the overall financial system has ample capital for lending. To address this, NRB plans to introduce ‘Perpetual Preference Shares’ to bolster banks’ capital. The third review of the monetary policy includes facilitating the use of these instruments to strengthen banks and financial institutions’ capital base.

Experts urge the Ministry of Finance and NRB to engage in effective dialogue with the private sector to boost investment and loan demand. They recommend the government entrust large infrastructure projects to the private sector and provide incentives like interest discounts to stimulate investment.

NRB spokesperson Gunakar Bhatt acknowledged the slowdown in economic activity and resultant low loan demand. He highlighted recent monetary policy adjustments aimed at increasing credit demand and supporting economic activities. Despite these efforts, credit expansion remains below target.

Monthly reports reveal significant liquidity management by NRB, with banks and financial institutions utilizing NPR 795 billion in liquidity from NRB through various facilities from July to March.

The National Statistics Office projects a modest economic growth rate of 3.54% at basic prices for the current fiscal year, attributed to robust expansion in tourism, hotels, electricity supply, and other sectors. However, negative growth in construction and manufacturing, and marginal expansion in trade, contribute to the overall lower growth rate.

Preliminary estimates suggest a 7.80% growth rate for the financial and insurance sector, driven by increased bank deposits, loan flow, and service fee income.

This disparity between deposit growth and loan expansion underscores the need for targeted policies to stimulate economic activity and private sector investment.