Kathmandu. Despite the accumulation of excess liquidity of more than Rs 13 trillion in banks and financial institutions, credit flow to the private sector has not increased as expected. Even though the interest rate of loans has come down to 4 to 5 percent, the money in the banking system has not been mobilized for production, trade and economic activities due to the lack of expansion of new investment.
According to the Nepal Rastra Bank, banks and financial institutions have more than Rs 10 trillion in excess liquidity. However, due to the weak demand for loans, banks are in a situation to keep the money in the central bank instead of collecting deposits and disbursing loans. According to the data of the Rastra Bank, banks and financial institutions have invested more than Rs 400 billion in the central bank as of September 30. The central bank has been giving 2.75 percent interest annually on such deposits.
This shows that the challenge of mobilizing the available funds rather than the shortage of money in the banking system is deepening. Despite having sufficient liquidity and cheap interest rates in the banks, the investment expansion of the banks has been affected due to the lack of demand for loans. On the other hand, the interest payment of the money kept in the central bank is also seen as a big liability.
According to the data, the Rastra Bank is paying more than Rs 116.88 billion annually in interest on the deposits of banks and financial institutions. However, due to the weak demand for loans in the private sector, a large amount of money in the banking system has not been used adequately to keep the economy moving.
Even though there is enough money to invest in banks and financial institutions, the demand for loans in the private sector has not increased. The impact of fiscal and monetary policy after the Covid pandemic, the decline in real estate and stock markets, the problems of the cooperative sector, the weak expansion of the productive sector and the decrease in market demand have weakened the risk bearing capacity of the private sector. The private sector, which has not fully recovered from the economic damage of the past, is reluctant to make new investments immediately.
Even though the interest rate of loans has decreased, the banks themselves have to ask for loans as the industrialists and businessmen are not enthusiastic about taking loans. The demand for loans has been affected by the tendency to seek clarity on what the government policy will be like in the future before making new investments. Unless there is policy stability, security of investment and easy dialogue with the government, cheap interest rates alone cannot increase the demand for loans.
The private sector has been demanding that the government should assure that the industrial policies and laws will not change for at least 10 years. The problems in the Labour Act, Industrial Act, Economic Act, Customs Policy and other regulatory provisions need to be resolved. At present, about 166 Acts and laws are in the process of being amended. A draft law related to the recovery of loans has also been submitted to the government. However, it is not enough to just move forward with the process of amending the law, but its impact needs to be seen in practice.
Another challenge for the banking sector is the increasing pressure of loan recovery and non-banking assets. Due to the non-recovery of loans, the assets including land and buildings that the banks have to accept are not being sold. The non-banking assets of banks and financial institutions have reached Rs 56.80 billion. This has created pressure on banks to allocate more money for loan loss management, which can also affect profits and capital funds.
The loss of capital invested in real estate and the decline in business turnover have also hampered the expansion of credit. When the turnover decreases, the financial capacity of the businessman is seen to be weak and it will be difficult to get more loans from the bank. For example, if the turnover of a business with a turnover of Rs 1 crore is reduced to Rs 50 lakh, then it may be difficult to get more loans as the bank evaluates the loan on the basis of reduced turnover and financial capacity.
A fall in the value of real estate can also affect the value of the property held as collateral. This is likely to increase the risk to the bank’s loan recovery and the quality of the property. Therefore, the availability of money in the bank will not make it easy to extend the loan. The turnover of the business, the value of the collateral, and the ability to repay the loan also affect the flow of loans.
However, due to the low capital expenditure of the government, the flow of money in the market has not increased. According to the Office of the Comptroller and Auditor General, out of the Rs 431.10 billion capital budget allocated for the current fiscal year till October 30, only Rs 12.25 billion or 2.84 percent has been spent. Out of Rs 1,270.58 billion allocated for current expenditure, 16.16 percent or Rs 205.38 billion has been spent. Out of Rs 422.64 billion allocated for financial management, 17.71 percent or Rs 74.85 billion has been spent.
Experts say that when the government expenditure on development works increases, money will reach the hands of the general public and businessmen, purchasing power will increase and demand will be created in the market.
