Banking System Faces Challenges in Loan Distribution and Interest Rate Reduction

The news highlights the financial situation in Nepal’s banking system, focusing on key aspects such as deposit accumulation, liquidity conditions, loan distribution, and interest rate reduction. With approximately 1.6 trillion NPR in deposits and around 1.5 trillion NPR available for lending, the upcoming fiscal year is expected to witness a significant increase in lending capacity. The stable liquidity situation is attributed to factors such as a low loan-to-deposit ratio, a reduced interest rate on loans, and the impact of remittances and government spending. The government encourages banks to prioritize lending in productive sectors while implementing stricter policies for luxury imports. Overall, the news sheds light on the current state of Nepal’s financial system and its potential implications for the economy.

Kathmandu – Approximately NPR 616 billion has been deposited in banks and financial institutions until the end of the current fiscal year (mid-July). According to government statistics, around NPR 500 billion is the amount of loans available and an additional NPR 100 billion has been made more liquid, making a total of NPR 616 billion in the financial system. The increase in deposits and a lower flow of loans have led to around NPR 616 billion being deposited in banks and financial institutions.

Currently, the amount (money) in the financial system needs to increase more than before to meet the loan flow to all banks and financial institutions throughout the upcoming fiscal year. Experts state that the necessary funds (sources) will be available for banks to provide loans throughout the fiscal year when the deposits made in mid-July are taken into account. From Ashar 1 to Ashar 30, around NPR 577 billion has been collected by banks and financial institutions, while the loan extension has increased by only NPR 137 billion. The growth rate of deposits in the current fiscal year is 11.18%, and the interest rate on loans is 2.91%. Due to the slowdown in the domestic economy, the demand for loans has decreased significantly, while the increase in remittances and government spending has resulted in a good growth rate in deposits for banks.

Looking at the situation of loan growth in the previous year, the target of economic growth set in the budget, and the target of loan extension by the central bank, it is estimated that around NPR 400 to 500 billion will be required for loan extension from the private sector in the upcoming fiscal year. The aforementioned amount deposited in the financial system until mid-July provides ease to banks, as stated by financial sector expert Parashuram Kunwar Kshetri.

“The upcoming fiscal year will not pose any problems for banks in terms of the amount that can be invested,” says Kshetri, “The main issue is whether entrepreneurs and businesses demand loans or not.” The private sector demands loans for two reasons: one is to expand new businesses, and the other is to expand existing businesses. Kshetri emphasizes that the government needs to implement policies that boost the confidence of private-sector businesses in order to increase their borrowing capacity. He also mentioned that the demand for loans has decreased due to the strengthening of the private sector’s self-reliance.

The state’s current account is still in deficit, which is why the central bank needs to adopt both strict and flexible policies in the financial sector. “In the upcoming fiscal year, a policy should be implemented to provide loans at a lower interest rate in production-based sectors such as SMEs, agriculture, industry, and tourism,” he added. “However, strict policies should be adopted for the flow of loans in luxury and non-productive imports.”

During the last fiscal year, banks and financial institutions had a loan flow of NPR 539 billion, while deposits amounted to NPR 419 billion. In the first six months of the last fiscal year, NPR 566 billion flowed as loans, and in the last six months, NPR 330 billion flowed as loans. Due to the banks’ aggressive loan extension in the first six months of the last fiscal year, the central bank implemented strict policies in loan extension during the last six months. As a result, only NPR 330 billion flowed as loans.

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