Despite Interest Rate Cuts, Banks Struggle to Boost Lending

Despite recent efforts by commercial banks in Nepal to stimulate economic growth through significant interest rate reductions, the anticipated surge in loan demand remains elusive. Banks, grappling with a sluggish economy and mounting non-performing assets (NPAs), find themselves unable to catalyze lending activities as businesses exhibit low confidence amidst the ongoing economic slowdown.

President of the Nepal Bankers’ Association, Sunil KC, highlighted the primary reasons behind the stagnation in loan demand. “It is mainly due to the low confidence in the business sector, while banks have been facing problems in cash flow because of mounting pressure on their non-performing assets,” explained KC.

Commercial banks have recently slashed their base interest rates to as low as 7.77 percent, responding to an excess of loanable funds. The weighted average base rate, as of mid-January, stands at approximately 9.5 percent, down from 10.91 percent in the same period last year.

This interest rate decline followed the Nepal Rastra Bank’s (NRB) leniency in the first review of the monetary policy for 2023/24 in December. NRB’s adjustments included a reduction in the bank rate from 7.5 percent to 7 percent and a revision of the policy rate from 6.5 percent to 5.5 percent, aimed at addressing private sector demands for a more accommodating policy environment.

While the lowered interest rates provided some relief to investors in the share market, the impact on confidence within the real estate sector has been limited. KC emphasized that the aggregate demand has suffered due to reduced domestic consumption and a decline in the demand for imported goods, resulting in a reluctance among businesses to pursue credit transactions.

Despite a notable increase in deposit collection, lending has not kept pace, prompting KC to suggest that interest rates could see further declines in the near future. “It is obvious also as the deposit collection is rising while the lending has not increased by a notable amount,” he noted.

According to NRB records, the total lending of banks and financial institutions has reached Rs 5.081 trillion, reflecting a modest increase of Rs 203 billion since mid-July 2023. In the same period, deposit collection has surged by Rs 365 billion to Rs 6.141 trillion. The challenge remains for banks to stimulate lending and revive economic activities in the face of prevailing uncertainties.