Kathmandu. Although the central bank has adopted flexible measures ranging from reducing interest rates to easing other regulatory policies through the monetary policy, the morale of the private sector has not been lifted. The credit flow has not increased as expected in the first 4 months of the current fiscal year as the industries and businesses have not shown interest in taking new loans despite the policy concessions. This indicates that the economy is still in a confidence crisis.
Currently, liquidity in the banking system is historically plentiful. Interest rates have also fallen to the lowest level in the last year. However, credit flow to the private sector has not increased as expected.
According to Nepal Rastra Bank, credit to the private sector has increased by only 1.2 percent in the period from mid-July to mid-October. Such loans had increased by 2.5 percent in the same period of the previous year. Experts say that the credit expansion has been less than half even as the interest rate is decreasing, which is not in the monetary policy but in the confidence of the private sector and the expectation of the future.
The private sector is still in a state of panic, especially in the aftermath of the Genji agitation of September 23 and 24. Experts say that although the private sector has a major role to play in solving the current problem, the problem has arisen due to lack of morale of the private sector.
Due to the post-agitation environment, political uncertainty and overall economic risks, industrialists and businessmen seem to be in a wait-and-see situation rather than expanding by taking new loans. As a result, they say, the demand for loans has not been generated.
The demoralization of the private sector is not limited to the impact of the movement. Even as overall credit growth remains weak, only the stock market and home loans seem to be holding up the credit numbers to some extent. In the first four months of the current FY, margin loans grew by 3.9 percent and real estate loans by 3.4 percent. This indicates that credit is shifting from the productive sector to the market and fixed assets. Which is considered to be dangerous for the economy in the long run.
Loans directly linked to production, employment and trade have declined. Overdraft loans decreased by 4.9 percent and trust receipt (import) loans decreased by 2.1 percent. Since overdraft loans are used for daily transactions, salary payments and operating expenses, the decline indicates that economic activity is slowing.
At the same time, the decrease in import credit shows that the import of raw materials, machinery and consumer goods has contracted. Experts say that this will have an impact on production, employment and tax collection in the coming months. This is seen as an indicator that the economy is heading towards the risk of contraction rather than recovery.
Nepal Rastra Bank (NRB) has projected a 12 percent growth in loans by the end of the current fiscal year. However, this target has been challenged by the fact that loans have grown by only 1.2 percent in four months. Even the officials of the Rastra Bank have admitted that although the loan growth is positive, it is not expected.
On the other hand, deposits in the banking system are increasing rapidly. Deposits increased by 3.1 percent in the first four months and 13.4 percent on a yearly basis. Even with more than Rs 10 trillion of investable money piling up in the banks, the loan has not increased, which has put pressure on the income and financial strategy of the banks.
According to analysts, the problem is not just liquidity but trust. Cheap interest rates and flexible policies have also not been able to speed up credit flow as the private sector does not see a clear economic future. Unless political stability, policy clarity and business-friendly environment are ensured, it will be difficult to achieve the goal of reviving the economy through credit expansion.
