Banks fail to attract investors to take loans despite lowering interest rates

Published On: February 4, 2024 09:30 AM NPT By: Republica | @RepublicaNepal

‘Interest rates likely to fall further in coming days’

KATHMANDU, Feb 4: Despite lowering their interest rates, banks are unable to increase their lending due to low demand for loans amid low business confidence triggered by the ongoing economic slowdown.

According to bankers, demand for loans has not increased as expected. “It is mainly due to the low confidence in the business sector, while banks have been facing problems in cash flow because of mounting pressure on their non-performing assets,” said Sunil KC, president of the Nepal Bankers’ Association.

Recently, commercial banks have reduced their base interest rate to as low as 7.77 percent after having an excessive amount of loanable funds with them. At present, the weighted average base rate of banks stands at around 9.5 percent as of mid-January, which stood at 10.91 percent in the same period last year.

The notable drop in the interest rates has come after Nepal Rastra Bank (NRB) became lenient in the issue through the first review of the monetary policy for 2023/24 in the first week of December. The NRB reduced the bank rate from 7.5 percent to 7 percent, while the policy rate was also revised to 5.5 percent from 6.5 percent.

The NRB tried to address the plea of the private sector that has long been mounting pressure on the central bank to enforce lenient policy to take down the interest rates. To some extent, it has given some respite to the investors in the share market. However, it has failed to boost the confidence largely of the investors in the real estate sector.

KC said the aggregate demand has dropped due to the fall in domestic consumption whereas the demand of imported goods have also declined, taking down the demand for loans. According to him, the businesspersons have also reported to have stopped credit transactions and rather focused on cash-based transactions.

KC said the interest rates could further decline in the coming days. “It is obvious also as the deposit collection is rising while the lending has not increased by a notable amount,” he said.

The NRB records show that the total lending of the banks and financial institutions has reached Rs 5.081 trillion, an increase by Rs 203 billion since mid-July 2023. In the same period, deposit collection has increased by Rs 365 billion to Rs 6.141 trillion.