Kathmandu. Even with the reduction in interest rates, it will be difficult to meet the target of 12 percent credit expansion to the private sector from the banking system. By half of the fiscal year, not even one-third of the target has been extended.
At present, more than Rs 10 trillion excess liquidity is accumulated in the banking system. Due to excess liquidity, the interest rate of the bank is continuously falling. The weighted average interest rate on loans has come down to 7.12 percent. This is the lowest level so far. However, despite such cheap interest rates and sufficient investment, the loan has not been expanded.
Current fiscal year 2082. In the first six months of 2018, private sector credit has increased by only 3.6 percent. That’s not even half of the annual target.
Nepal Rastra Bank (NRB), through the Monetary Policy, had projected that credit to the private sector would expand by 12 percent in the current fiscal year. However, only one-third of the target has been achieved in half a year. If this trend continues, credit expansion is expected to be around 7 percent for the next one year.
Currently, the total loan flow has reached Rs 5.783 trillion. However, when deposit growth is higher than loans, banks have accumulated investable money. The loan-to-deposit ratio (CD ratio) of some banks has dropped to 60 percent. The weighted average interest rate of deposits has come down from 5.77 percent in Ashad 2081 to 4.19 percent in Ashad 2082 and 3.56 percent in Poush 2082. The lack of improvement in credit expansion has become a challenge for the banking sector.
The interest rate on the loan had reached 13.03 percent in February-March 2021. After that, it gradually declined to 9.93 percent in mid-July 2081, 7.85 percent in mid-July 2082 and 7.12 percent in mid-January 2082. Even though interest rates have fallen to single digits, the demand for private sector loans has not increased as expected.
Bankers are expecting some improvement in credit expansion in the coming months. They believe that the upcoming elections and the policy priorities of the new government will boost the morale of the private sector. It is expected that the investors who are in a ‘wait and see’ state may be active in the hope that the message of stability will be sent after the election and policy clarity will be reached.
Bankers also estimate that the intensity of the implementation of the budget towards the end of the fiscal year will also help in the expansion of credit. In the last four months of the year, the demand for working capital and project loans is likely to increase due to the increase in government capital expenditure, contract payment and the construction and supply sector will be active. In the past years too, there has been a tendency to increase the demand for short-term loans from the banking system due to the increase in government spending.
