Kathmandu- Credit expansion has gained momentum in recent months. By the end of Magh (mid-January to mid-February), banks and financial institutions had invested Rs 283 billion in loans, with an additional Rs 20 billion disbursed in Falgun (mid-February to mid-March).
For the current fiscal year, Nepal Rastra Bank (NRB) has set a credit expansion target of 12.5 percent. With the latest disbursements, total loan investment in the system has now reached Rs 303 billion.
The increase in loan investment has been driven by rising imports, a surge in stock market activity, higher disbursements of working capital loans, and growth in term loan investments.
As lending picks up, economic activity is expected to vibrant.
However, in the past, NRB’s monetary policies had led to a stagnation in loan investment. Stricter measures on Letters of Credit (LC) to safeguard foreign exchange reserves, higher risk weightage on overdraft facilities, hire purchase loans, share loans, and import loans, as well as new working capital loan guidelines, contributed to this decline.
Additionally, the recent economic slowdown has led to an increase in non-performing loans (NPLs), putting pressure on banks’ capital bases and further restricting loan investment.
Despite a stable credit-to-deposit ratio, banks remain cautious about lending due to capital constraints and potential capital charges.
The banking system currently holds around Rs 700 billion in investable funds. However, instead of aggressively disbursing new loans, many banks are prioritizing loan recovery, particularly those facing capital pressure.
Banks appear to be focusing on reducing NPLs to free up capital and boost distributable profits. By the end of Falgun, total deposits in the banking system stood at Rs 674 billion billion, while total loan disbursement reached Rs 546 billion.
At the end of Magh, total loan investment was Rs 544 billion, with an average credit-to-deposit ratio of 79.72 percent.
Interbank transactions remain limited to 3 percent. Meanwhile, NRB has set the deposit collection rate at 3 percent to ensure that savings account interest rates do not fall below this threshold, thereby managing liquidity in the system.
As of now, banks hold around Rs 98 billion in the standing deposit facility and Rs 160 billion in deposit collection instruments, bringing total available liquidity to Rs 258 billion.
The average deposit interest rate currently stands at 4.62 percent, while the average lending rate is 8.55 percent.
