Spread the love

By Shanker Man Singh

Nepal Rastra Bank’s homework for the fiscal year 2081/82 and the public hearing in the first week of Shrawan, have focused on whether the policy of making the monetary policy will increase the demand for loans or not!

Since the demand for loans did not increase as expected in the previous fiscal year 2080/81, it is natural for many to expect the future monetary policy. The misappropriation of savings and credit abuse seen in savings and loan cooperatives has challenged the financial sector.

Loans for imports have also decreased. In the year 2080/81, concessional loans are decreasing in the country, while agricultural loans and women’s enterprise loans are also decreasing.

The interest rate is continuously declining. From the private sector to the government, the monetary policy should not only keep the market moving but also work to increase the demand for credit. Even after it was mentioned in the budget that steps will be taken to make the economy dynamic through the monetary policy, everyone’s attention has been drawn towards the upcoming monetary policy.

According to some observers, monetary policy cannot increase the demand for credit. They argue that although expectations are high on monetary policy, it should not be relied upon to increase credit demand as it has its own limits.

For this, the market economy has to be made operational to increase the demand for loans. For this, not the monetary policy, but the financial policy should work. Since that is the case, don’t expect too much from the monetary policy.

Even if the government increases the capital expenditure, the demand for credit will increase. However, it is a bitter reality that the demand for loans has not increased because the government sector is very weak. It does not seem that the government has to play a role in making the market run.

Although the changes in monetary policy may have some positive effects, the demand for loans will not increase as much as it should. For the economy, banks must create loans to keep the economy active.

Most of the money we use for day-to-day transactions, the funds we deposit in our bank accounts, is bank-created credit.

Credit creation by banks makes it easier for individuals and businesses to access credit, which they can use to finance major items, invest in their operations or meet short-term cash flow needs.

Credit creation by banks increases competition among lenders, which can lead to lower interest rates, more favorable loan terms, and a wider range of loan products.

By providing loans to new and innovative businesses, banks can support economic growth and innovation. Credit creation can also encourage savings, as individuals and businesses have more opportunities to invest their funds and earn returns on their savings.

However, it is important to remember that the creation of debt can also lead to financial instability if it is not managed properly. Credit creation in general terms is an expansion of deposits. Here banks expand their deposits as a multiple of their cash reserves.

Credit flow credit disbursement is the most important function of commercial banks and financial institutions. Commercial banks accept deposits and lend to needy borrowers. To meet the cash requirements of depositors they are required to keep a certain percentage amount as reserves with the central bank.

After keeping the required amount in reserve, the commercial banks give the rest of the public deposits as loans. The amount of reserves kept by banks is called the Cash Reserve Ratio (CRR) and the Nepal Rastra Bank determines it from time to time and also directs the banks.

Recently in the banking sector of Nepal, as the loan disbursement is low, deposits have started piling up in the banks. Due to the slowdown in the economy and high interest rates, there is no demand for loans, so deposits are piling up in banks.

Despite the high monetary liquidity in banks and financial institutions, there has been a problem due to the lack of demand for loans. The banks have said that they are not able to give interest to the depositors as they want.

It is said that the problem has increased when there is no deposit even when there is a demand for loans, and sometimes there is no demand even when there is more liquidity. In the past, Nepal Rastra Bank extended the period of loan restructuring and rescheduling to provide relief to industrialists affected by the economic recession.

Also, at the request of the borrower, after analyzing the cash flow and income of the industry/business, banks can decide on restructuring based on the need and justification.

The banks do not want to be aggressive in loan investment. It is suspected that the banks did not prefer to give new loans when they were facing problems because they could not collect the old loans. On the other hand, the bankers say that the loan disbursement will gradually increase. Bankers have been saying publicly that the demand for loans will gradually increase as the interest rates of banks are gradually decreasing.

NRB has stated that although credit from banks and the financial sector has been increasing gradually, it has not increased as expected. Debates and disputes about liquidity and credit availability between Nepal’s private sector and the banking and financial sector are not new to us. Relationships between each other are necessary for both regarding loan transactions. One does not exist without the other.

However, disputes and accusations continue between the two areas. In this regard, whether the banks and financial sector really charged high interest rates or the interest rates became high due to other reasons, would be a matter of investigation. Due to the external sector, monetary policy and the budget, the situation has changed somewhat.

Money has been accumulated to invest in banks and financial institutions. However, the private sector has not requested loans. There is a decrease in demand compared to an increase in deposits. The money has been accumulated after the loan investment has decreased compared to the bank’s deposit collection.

Banks and financial institutions have had to publicize various schemes in recent days after the demand for loans did not come. The question has been raised as to why the private sector, which has always complained of not getting loans in the past, has not demanded loans even though they have enough money now.

There are certain reasons for the lack of demand for loans now. In this perspective, especially since the demand for goods and services has decreased in the market, the private sector has not been able to dare to increase production by adding loans.

At present, the industries have not produced more than 40-50 percent of their capacity and the goods produced are not sold. In such a situation, it is natural not to take the risk of producing more by adding loans.

Another reason for the lack of demand for loans is the high interest rate. Now, it has become a situation to get a loan around the percentage of a single rate. High interest rates increase the cost of production.

Therefore, in the past, many industrialists and businessmen were not seen in favor of producing expensive goods by taking loans at high interest rates. When there are various problems such as the economy slowing down, it is difficult to sell manufactured goods, old loans not being recovered, and the banking sector is also not trying to give credit to what it has received in the past.

Instead, it was buying government tenders. Effects of excess liquidity in the financial sector, banks sometimes have to face the problem of not being able to give loans and sometimes they have to take stress by not investing the money. This year, there must have been a problem in not being able to lend the money to the bank.

Overall, excess liquidity hurts the economy, just like liquidity shortages. If the deposits in the banks increase but the loans do not increase, the interest expenses of the banks will increase and the operating profit will be affected.

As a result, banks start reducing interest rates on deposits and depositors are affected. On the other hand, the interest rate of loans also decreases, in the absence of an investment environment, the demand for loans cannot increase and there is an alarming sign that investments will start flowing towards unproductive sectors.

Also, after receiving low interest in banks, deposits go to unregulated and unorganized institutions and some cooperatives, which are away from supervision and monitoring, which causes financial risk. Now after some time, its effect will be deposited. All the banks have reduced the deposit interest rate.

However, the interest rate of the loan is not discussed as much as the interest rate of the deposit, so it is being ignored. Banking experts say that when deposit interest rates are low, people are discouraged from saving.

Due to the complete deterioration of the investment environment, there is no bank investment and excessive liquidity is accumulated due to the lack of investment. This problem is also due to the limited number of places to invest in Nepal.

If there is too much liquidity in the banks, Nepal Rastra Bank will issue a reverse repo that will happen in all the countries. “Reverse Repo” is a tool used to calculate short-term liquidity from the banking system if there is a situation of excess liquidity in the banking system.

On the day of the issue of this instrument, the amount will be withdrawn from the account of the successful bidder in Nepal Rastra Bank, so the liquidity will be calculated for the specified period. Besides, the Nepal Rastra Bank also manages liquidity through bonds.

In addition, NRB manages liquidity by using policy arrangements and standards such as interest rate corridors, CCD ratios, interbank transactions, etc.

In the case of the accumulation of investable deposits in Nepal, the flow of credit can be expected to increase after the creation of favorable conditions.

Also, since the credit to the private sector is close to the increase in the price of the country, there is a basis that the actual credit has not flowed to the private sector. Therefore, economic growth has not been that high. It seems that serious attention should also be paid to these.

The views expressed in this article are the author’s own and do not necessarily reflect People’s Review’s editorial stance.