Kathmandu. In the economy that has been sluggish for a long time, there are signs of positive movement through the banking sector. At a time when banks and financial institutions have accumulated excess liquidity and interest rates have fallen to historic lows, the number of new loan proposals has increased rapidly. The banking sector has taken this increase in the demand for loans, which has been stalled for the last 2 years.
Generally, the first month of the financial year is not considered as the right time to issue new loans. But this time the situation has changed. Not only regular business proposals in banks, but enquiries have also increased for new and big projects. The demand for credit, which used to be concentrated only in the hydropower sector, has now expanded to the manufacturing industries, infrastructure development and technology sectors, raising hopes that the economy will be revitalized.
Looking at the data of the last two fiscal years, Nepal’s credit flow seems to be very slow. Fiscal Year 2081. Credit flow increased by 8.2 percent or Rs 424 billion in fiscal year 2018. In 2018, the rate had shrunk to 6.33 per cent, or Rs 315 billion. This low credit investment had a direct impact on the overall economic activities of the country. Due to lack of investment in the manufacturing sector, employment opportunities were lost and the government’s revenue collection was severely affected due to the decrease in demand in the market. However, now the banks have started to attract investors after the banks have drastically cut the interest rates on both deposits and loans.
Currently, the average interest rate on loans in the banking system is around 6.5 percent. Some banks are offering loan schemes at fixed interest rates of less than 6 percent. With the base rate of banks falling to 4.90 percent, there is a competition among banks to give cheap loans.
In today’s market, the base rate falling below 5 percent is a historic opportunity for investors. Some commercial banks are offering loans at a fixed interest rate of 5.99 per cent, while some have offered loans at a premium of 0.25 per cent over the base rate. For example, banks with a low base rate of 4.42 per cent charge a premium of 0.25 to 0.50 per cent on schemes such as home loans, foreign employment loans, and social security-based housing loans.
The impact of this low interest rate is also being seen in real estate and stock markets. In the last two-three years, the real estate sector, which has been in the grip of recession, has seen a significant increase in enquiries and offers for loans. Those who think of long-term investment have seen the current low interest rates as a ‘golden window’. Big houses in agriculture, infrastructure and manufacturing sectors are also demanding restructuring of old loans and new loans to expand their business.
The central bank was compelled to pull money from the market continuously for liquidity management as the banks were piling up liquidity. Banking profits were also affected due to the accumulation of money in the bank but there was no demand in the market. However, now the proposals from the manufacturing sector and infrastructure sector have given relief to the banks. Bankers believe that due to cheap interest rates, loans are not likely to be expensive immediately, which has given new confidence to the entrepreneurs.
In particular, large public and private sector banks have come up with schemes for agriculture and small and medium enterprises (SMEs) at around 5 percent. Bankers say that this has also encouraged young and small entrepreneurs who want to start business with small capital.
