Back in August, banks had announced they had comfortable liquidity and were ready to resume normal lending. However, by mid-October (the end of first quarter), 31 commercial banks have managed to lend only Rs 8 billion, Nepal Rastra Bank (NRB) records show.[break]
Entrepreneurs attributed the slowing credit demand to high lending rates, which over the last two years have jumped to 16.5 percent from about 10 percent.
Bankers said they still do not feel they are in a position to slash the lending rates. "On one hand, the central bank´s directive has asked us to lower credit-deposit ratio at 80 percent by this fiscal year end and on the other hand, there is pressure to sustain profit as well. So, slashing lending rates is out of question for now," said Suman Joshi, CEO of Laxmi Bank.
Bankers attributed the drop in credit demand to a combination of factors. First, manufacturing sector is still contracting and amid labor row and political instability, industrialists are neither eager to expand their business nor ready to start a new project, said Sashin Joshi, former president of Nepal Bankers´ Association.
Second, the real estate sector remains sluggish despite most business houses and trading firms having their presence in this sector. Bankers said as the realty slump has blocked the money of many entrepreneurs who are now facing troubles to serve past loans, there is no prospect of them seeking fresh loans.
On top of that, bankers said involvement of large business houses in evasion of value added tax (VAT) and their reluctance to expand business until the cases are solved too have made the credit demand to slow down.
The demand for fresh credit during the period remained below Rs 13.7 billion, a level seen for the same period last year. "Banks are barely finding good borrowers approaching them for loans," said Ashoke Rana, president of Nepal Bankers´ Association.
All the while, depositors have continued to switch their savings to commercial banks from development banks and finance companies.
"This has complicated problems for us," said Rana, who added that the banks, which currently have surplus liquidity of over Rs 24 billion, are presently with net loss. "Fundamentally, the market is running on low confidence and this has caused suppression of lending growth," he said.
Given the situation, the banks recently asked the central bank to mop up the liquidity from them. However, the central bank reportedly dismissed the request. Instead, it advised the bankers to innovate and make efforts to give loans in productive sector, where banks´ credit still remains low.
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