KATHMANDU: Despite the rosy picture painted by government figures, the lethargic rate of credit expansion by banks is signalling that the economy is heading towards a slowdown.
In the first three quarters of current fiscal year, the amount of credit floated by commercial banks has grown by only 11.9 per cent, according to Nepal Rastra Bank (NRB) figures.
Deposits have grown by 15.8 per cent during the review period. Commercial banks have about Rs 792 billion as deposits but they have floated loans worth only Rs 589 billion in the period.
Even after omitting 20 per cent of the total deposit that could not be lent to maintain regulatory Credit to Deposit Ratio, the banks still have an idle balance of around Rs 50 billion. “The presence of idle loanable funds in the financial system means that economic activities are contracting,” pointed out economist Dr Bishwambher Pyakuryal.
“The credibility of our economy in the international eyes is being maintained due to the whopping Balance of Payments (BoP) surplus recorded lately but economic reality is different,” he added.
In the first nine months, Nepal recorded a BoP surplus of Rs 91 billion and inflation also abated to almost the target level, says NRB data. Growth projection also estimates GDP to grow by anywhere near 4.5 per cent thanks to the bounty harvest this year.
However, lack of demand
for credit from the private sector despite the excess liquidity means employment generating activities are not taking place in the economy. When credit expands, consumers can borrow and spend more, and businesses can borrow and invest more. Increasing consumption and investment creates employment and expands income and profits, thus heralding a much aspired for growth in the economy.
A year ago, annual credit growth rate stood at 12.1 per cent and a year ago in fiscal 2009-10, credit expanded at 16.8 per cent. The liquidity crunch had been blamed for the inability of the banks to extend more credit last year. Though the financial institutions are overwhelmed with deposits their loan flotation level is still low.
“The government and the regulator have not introduced any measures to boost investor confidence or make banks offer easy access to credit,” said Dr Pyakuryal, lamenting that banks have also failed to offer competitive lending by minimising their operating profit.
Another economist Dr Chiranjibi Nepal also supports that the Nepali economy is not doing well in spite of the veil of prosperity. “Our economy is being supported by the remittance sent by migrant workers from abroad and not by domestic economic activities,” he said, calling the current Nepali economy as swollen.
“Our economy appears to be healthy only due to remittance and if that source dries up we will be in a really bad situation,” he pointed out. However, bankers have not yet lost heart with the current slow rate of credit expansion.
“If this situation continues for some more time then only do we need to start worrying but in the current scenario there is still room for hope,” pointed out vice-president of Nepal Bankers’ Association Upendra Paudyal.
“If the political situation improves and interest rates see a downward revision along with a solution to power shortage, then credit will pick up instantly,” said Paudyal, who is also CEO of NMB Bank.