Kathmandu. Although there is more liquidity in the banking system, the economy has not been able to rebound as credit expansion has not increased comparatively.
According to the latest data, the total deposit has reached Rs 7.707 trillion and the total loan flow is limited to Rs 5.788 trillion. The loan-to-deposit (CD) ratio has come down to 74.35 percent. This shows that there is enough money to invest in the banks.
According to the NRB, the commercial banks have collected deposits of Rs 6.942 trillion and loan disbursement of Rs 5.15 trillion. Deposits of Rs 765 billion and loans of Rs 638 billion are seen in other banks and financial institutions. The interbank interest rate (LCY-weighted average) is capped at 2.75 percent.
Interest rates have been falling due to the monetary policy accommodative of the central bank. The average base rate of commercial banks fell to 5.29 percent in December 2002. It was 6.65 percent in December 2081.
Similarly, the base rate of development banks has been reduced from 8.61 percent to 7.60 percent and that of finance companies has been reduced from 9.50 percent to 7.98 percent.
Although the cost of credit has decreased significantly due to the reduction in interest rates, the demand for credit has not increased as expected. The main reason for the lack of credit expansion in recent times is the low morale of the private sector.
The private sector has felt insecure after the violent protests on September 23 and 23. The private sector has been saying that this has demoralized the morale and the investment climate has been disturbed.
Representatives of the private sector are of the view that the confidence of the investors will be restored only when the elections are held in a fair and peaceful manner and a stable and strong government is formed. They believe that the economy will not be able to pick up without fear and policy stability.
The private sector has complained that all sectors including industry, trade, construction, banking and other sectors have been affected as the economy has not been able to pick up pace again after being sluggish for the past few years.
Bankers also say that the government should be more active in boosting the morale of the private sector to expand the loan. “The loan flow has not increased due to lack of confidence in investors,” said a banker, adding, “The government has not done enough to attract the private sector for investment.” ’
According to bankers, the lack of proper utilization of excess liquidity and the failure to convert the accumulated deposits into productive sectors puts pressure on the profitability of banks. They are of the view that the stagnation of investment could push the banking sector towards a long-term challenge, so all should work together to create investment-friendly environment now.
Economists say that more liquidity can fuel economic growth only if the government increases capital spending, encourages the private sector and creates a stable political environment. However, they insist that the government should take initiative for this. Otherwise, they warn, the current high liquidity situation could prove to be more of an opportunity for the banking sector.
