Demand for loans surged, as banks amassed 7.5 trillion in loans.

Despite the fact that the distribution-oriented budget and flexible monetary policy for the current financial year were put into place one and a half months ago, the anticipated improvement in the credit flow of banks and financial institutions has not materialized. Because of this, banks and other financial institutions have accumulated approximately Rs. as of last Thursday, August 13. By the end of June of last year, the banks held almost 8 billion of this sum. 

With the start of the new fiscal year came expectations that loan disbursement would improve because of the build-up of loanable funds in banks, the interest rate dropping to single digits, etc. However, according to banks, loan demand has not surged as anticipated. Due of the high demand during holidays like Dasain, Tihar, and Chhath this year, the vendors are currently forced to import the supplies. However, they claim that the bank loans have not much improved.

The credit-deposit ratio (or CD ratio) for banks and other financial institutions is 78.95 percent as of last Thursday. The total amount of deposits held by banks and other financial institutions during the same time period is 64 trillion 61 billion rupees. The National Bank has instructed banks and other financial institutions to lend up to 90% of the entire amount of deposits. As a result, the banks are now able to offer extra loans that total roughly 11% of the deposit. Roughly 7 billion rupees are involved.

A minimum of 20% of net liquid assets (net liquidity assets) must be retained by banks and other financial institutions as deposits. According to analysts, up until last Tuesday, around 6.5 billion loans have been made to banks from this perspective.

Both the growth rate of deposits and loans was negative in July of the previous year. However, as of July of this year, the loan has grown by $2 billion," the president of the Nepal Bankers' Association, Sunil KC, stated. "Most of the interest rates have also risen to single digits." However, it is not evident how the demand should rise. He stated that around 6.5 trillion rupees of investable funds had accumulated in the banks as a result of the lack of growth in credit demand. "In the last 10-15 days, there has been an improvement in loan demand," according to him, but "loan demand from the industry and construction sector has not increased."

According to National Bank data, during the past 1.5 months (from July 1 to August 11), bank and financial institution deposits fell by 43 billion while credit flow climbed by 19 billion. Loans fell by 17 billion and deposits by 1 trillion 59 billion in July of last year. The growth rates for deposits and loans have historically both been negative in July and then started to rise in August. This year has seen a continuation of this pattern. Deposits fell by 27 billion in August of last year, despite a 34 billion growth in loans. Bankers claim that since August of this year, the demand for loans has improved.

The president of the Nepal Industry Confederation, Rajesh Kumar Agarwal, claims that despite the ongoing decline in interest rates, the businesses are unable to take out new loans because of the National Bank's present capital loan requirements. The budget (financial policy), the monetary policy, and the new fiscal year all arrived. However, the industry did not see any progress, he claimed. "The problems of the industry are still there, the industries are running at 30 to 40 percent capacity."

He claims that because the industry does not have easy access to money, the problem in this area has not improved. According to Agarwal, "working capital loan guidelines have reduced the ability to take on more debt." The construction, industrial, and wholesale and retail sectors have been the main targets of working capital loan guidelines. A smaller amount of working capital loans is required by the tourism, hydropower, information technology, production-based agriculture, and other industries. However, the guidelines have adopted the same approach for other industries, including wholesale and retail trade, construction, and industry. This is the reason, he claimed, why the industry, construction, and wholesale and retail trade sectors have not improved, despite indications of improvement in other areas. According to him, there has been a three-year decline in the industry, construction, wholesale, and retail business sectors.

The firm should be expanded to accept more loans in accordance with the standards pertaining to current capital loans. However, business hasn't grown as of late. "Because the business has not increased, neither the industry has been able to take loans, nor the banks have been able to give loans," he stated. Out of 52 billion loans in the productive sector, he said that just around 16 percent—or about 8 billion—were supplied to the productive sector. "Policy directives from the state, not interest rates, are the industry's problem," he continued.

Expert in banking Parshuram Kunwar stated that the slowdown in economic activity has not resulted in a lack of market, which would explain the increase in demand for loans in banks. According to him, the government should work to ensure that economic activity is sustainable because the state of the economy is preventing a growth in the demand for loans. According to Kunwar, economic activity will continue when the government raises spending, and this will lead to a rise in the demand for loans. "There is no improvement in the market demand, the reasons for this may be many young people going abroad, the income of those staying in the country not being able to increase, new jobs not being created, etc.," he stated. This further demonstrates that neither market demand nor economic activity have expanded.

Throughout the entire year, the bank maintained an adequate amount of investable funds. Approximately 5 trillion rupees of investable funds were held in banks and other financial institutions by the end of June 2008. This sum was 3 billion 74 billion in mid-July, 4 and a half billion in August, and more than 5 billion in October and November. In November, January, and March, the loanable amount exceeded 6 trillion; however, in February and March, it was less than 6 trillion. At that point, the government took away the bank's ability to count the funds in accounts at the local level as deposits. Following that, the bank received deposits totaling over 6 billion in May and June as well as 8.5 billion in May. 

According to experts, loans are not always given out as planned. They recommend that in such a scenario, the National Bank and the Ministry of Finance should both push them to increase investment through fruitful discussions with the business community. In such a scenario, the government would be better served by contracting with the private sector to build roads and other major infrastructure projects rather than taking on more debt.