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. Bankers have said that the demand for loans has not increased as expected. They have attributed this to the low confidence in the business sector and the problems of cash flow that banks are facing as a result of their non-performing assets. Bankers fear that this situation is likely to get worse in the days ahead. They will be forced to further cut their interest rates in coming days as demand for the loan is still too low. While the lower interest rate is good news for those seeking loans, this also has negative consequences for the country's overall economy. Low interest rate in lending means low interest rate in saving as well. This may affect the savings and capital formation. Also, where there is no lending, there will be negative consequences on the jobs and overall economic activities in the country. Thus, the failure of banks to extend loans is not a positive sign as this will eventually affect the country’s economy negatively. The government bodies concerned must take necessary measures to boost confidence of investors, particularly those running SMEs.
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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 central bank 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. A survey report released by CNI earlier last month showed a significant erosion of entrepreneurial confidence. Since last year, the confidence level has been on a downward spiral, and this year, it has hit a new low. A staggering 55.32 percent of entrepreneurs are adopting a 'wait and watch' approach, putting their investment plans on hold. This hesitance stems from the lack of a conducive investment climate and the government's failure to address the pressing issues faced by the private sector.
Bankers have maintained that aggregate demand in the country has dropped due to the fall in domestic consumption whereas the demand for imported goods has also declined, taking down the demand for loans. Businesspersons have also reported to have stopped credit transactions and rather focused on cash-based transactions. 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. If this situation persists further, interest rates could further decline in the coming days. The decline in demand, coupled with the erosion of entrepreneurial confidence, demands immediate attention. The government must foster an environment conducive to investment and address the specific challenges faced by different sectors. It's time for decisive action to salvage Nepal's economy from the depths of recession and pave the way for sustainable growth.
