Kathmandu. Although the amount of investment in the banking system has increased significantly till March of the current fiscal year, the loan expansion has not been able to take place at the expected pace.
Liquidity has eased due to the rapid increase in deposits in banks and financial institutions. As a result, interest rates are continuously falling. However, despite the availability of cheap loans, the demand for loans from the private sector has not increased significantly.
According to the data, credit to the private sector has increased by only 4.4 percent till mid-March. This is lower than the 6 percent growth in the same period last year. This makes it clear that although the resources in the bank are sufficient, they are not being utilized as expected.
Current fiscal year 2082. From mid-July to mid-March 2018, loans have expanded to more than Rs 243 billion, taking the total loan to Rs 57 trillion. However, deposits increased by 6.6 percent to over Rs 7.7 trillion in the same period. This is a higher growth rate than the previous year.
The rapid growth in deposits has further eased liquidity in banks and has a direct impact on interest rates. The weighted average lending rate of commercial banks has come down to 6.90 percent as of mid-March, compared to 8.40 percent in the previous year. Interest rates on deposits have also come down significantly. This indicates that the overall financial cost has come down.
However, the problem is not only in the cost but also in the overall investment climate, as the credit expansion is not easy even as interest rates are falling. According to bankers, the private sector is still cautious about expanding investment. Investment decisions have been affected by relatively weak market demand, lack of assurance of business profitability and uncertainty created by past policy instability still not fully removed. Due to this, entrepreneurs are not able to invest in new projects even though they have cheap loans.
On the other hand, the international situation has also created indirect pressure on the economy. Tensions in the Middle East, in particular, have affected energy and commodity prices, affecting both the cost of production and consumption. Bankers say this has further weakened domestic market demand and increased uncertainty over investment expansion. In such a situation, the private sector seems to be stuck with a ‘wait and see’ strategy. This has further slowed down the demand for credit.
Regionally, there is an increase in credit in some sectors, but there is an imbalance in the quality of overall investment. Credit to the consumer sector has increased by double digits, while the construction, transport and industrial production have shown moderate growth. However, credit to agriculture and real estate sectors has declined. This indicates that the productive and long-term yielding sector is still under pressure.
Similarly, the high growth in import-related trust receipt loans and margin loans has led to more credit towards consumption and trade than production.
Meanwhile, the morale of the private sector is expected to boost with the formation of the new government. Experts say that there is a need to bring programmes that ensure policy stability, good governance and investment security. According to them, there is a possibility of increasing the demand for loans if targeted programs are brought in the areas of infrastructure development, productive industries and employment generation.
In addition, it is expected that the ‘trust crisis’ of the private sector will gradually be removed if policy clarity and credibility in implementation are maintained.
Although the liquidity in the banking system and the fall in interest rates to low levels are positive signs, it does not automatically lead to investment expansion. The next challenge is to focus on converting cheap credit into productive sectors, strengthening market demand and boosting the morale of the private sector. Bankers believe that credit demand will increase and the economy will regain momentum only if such an environment is created.
