Over Rs 13 Kharba Liquidity Piles Up in Banks, Yet Loan Demand Fails to Rise Even at Cheap Interest Rates

Kathmandu — Although more than Rs 13 kharba in excess liquidity has piled up in banks and financial institutions, credit flow to the private sector has not increased as expected. Even as lending rates have fallen to 4 to 5 percent, new investment has failed to expand, leaving the funds in the banking system unutilized in production, trade, and economic activity.

According to Nepal Rastra Bank, of the excess liquidity held by banks and financial institutions, more than Rs 10 kharba is investable funds. However, with weak loan demand, banks have found themselves in a situation where they prefer to keep funds with the central bank rather than collecting deposits and lending. According to central bank data, as of Ashoj 15, banks and financial institutions have invested more than Rs 4 kharba with the central bank. The central bank has been paying 2.75 percent annual interest on such deposits.

This shows that the challenge in the banking system is not a shortage of money but rather the deepening difficulty of mobilizing available funds. Despite adequate liquidity and cheap interest rates in banks, investment expansion has been affected because loan demand has not increased. On the other hand, interest payments on funds kept at the central bank have also emerged as a large liability.

According to data, the central bank is paying more than Rs 1 kharba 16 arba 88 crore 53 lakh in annual interest on deposits of banks and financial institutions. However, with weak loan demand in the private sector, the large amount of money in the banking system has not been adequately used to stimulate the economy.

Even though banks and financial institutions have sufficient investable funds, the economy has not been able to gain momentum because loan demand in the private sector has not increased. The impact of post-COVID financial and monetary policies, the decline in real estate and the stock market, problems in the cooperative sector, weak expansion of the productive sector, and a drop in market demand have weakened the private sector's capacity to bear risk. The private sector, which has not fully emerged from past economic damage, is hesitant to make new investments immediately.

Even though lending rates have fallen, industrialists and businessmen are not enthusiastic about taking loans, creating a situation where banks themselves have to urge borrowers to take loans. The tendency to seek clarity on future government policy before making new investments has affected loan demand. It appears that cheap interest rates alone cannot increase loan demand unless there is policy stability, investment security, and an environment for easy dialogue with the government.

The private sector has been demanding that the government provide assurance that industrial policy and laws will not change for at least 10 years. It has pointed out the need to resolve problems in the Labor Act, Industrial Act, Economic Act, customs policy, and other regulatory arrangements. Currently, about 166 acts and laws are in the process of amendment. A draft law on recovery of dues has also been submitted to the government. However, merely advancing the process of legal amendment is not enough; its impact must be seen in practice.

Another challenge for the banking sector is the growing pressure of loan recovery and non-banking assets. As loans cannot be recovered, land and buildings and other assets that banks have had to take over remain unsold. Non-banking assets of banks and financial institutions have reached Rs 56 arba 80 crore 10 lakh. This has created pressure on banks to allocate additional funds for loan loss provisioning, which could also affect profits and capital funds.

Capital invested in real estate being stuck and business turnover declining have also created obstacles to credit expansion. When turnover declines, the financial capacity of businesses appears weaker, making it difficult to obtain additional loans from banks. For example, if a business with annual turnover of Rs 1 crore sees its turnover fall to Rs 50 lakh, banks will assess loans based on the reduced turnover and financial capacity, making it difficult to obtain additional credit.

A decline in real estate prices can also affect the value of assets held as collateral. This could increase risks to banks' loan recovery and asset quality. Therefore, the availability of funds in banks alone does not make credit expansion easy. Business turnover, collateral value, and debt repayment capacity also influence credit flow.

On the other hand, low government capital expenditure has not increased money flow in the market. According to the Financial Comptroller General Office, as of Ashoj 16, of the Rs 4 kharba 31 arba 10 crore capital budget allocated for the current fiscal year, 12