Credit contraction to hit economy

KATHMANDU, SEP 3: 

The lull in the expansion of credit to the private sector by financial institutions indicates that the economy is headed downhill.

In fiscal year 2011-12, commercial banks, development banks and finance companies recorded a growth of 12.2 per cent, according to the annual macroeconomic data released by Nepal Rastra Bank.

In the previous fiscal year, the financial sector had expanded credit to the private sector by 14.4 per cent. 

Credit floated to the private sector amounted to about Rs 780 billion at the end of fiscal year 2011-12, which stood at Rs 690 billion in the beginning of the fiscal year. 

Likewise, claims on private sector — including interest accrued — increased by 11.3 per cent last fiscal year as compared to a growth of 13.9 per cent in the previous year. 

On the other hand, deposit mobilisation of financial institutions increased by 22.9 per cent in the review year, which had recorded a 12.9 per cent increment in the previous year.

The total deposit with financial institutions has exceeded Rs 1 trillion. “The crunch in credit to the private sector is a signal that production in the near future will also contract —both in manufacturing and agriculture. 

It will eventually hit employment and exports as well, as credit contraction is a sign of contraction in all economic activities,” pointed out economist Prof Dr Madan Kumar Dahal.

Expansion in credit leads to more borrowing which induces consumers to spend more and businesses to invest more. Increased consumption and investment creates jobs and expands income and profits, thus inspiring faster growth in the economy.

“If the situation prolongs then the impact of slow lending will be visible by the sixth month of the fiscal year, and then the central bank will bring some thrust in its half yearly review of the monetary policy,” added Dr Dahal.

In the last fiscal year, bumper crops and increased remittance had pushed GDP growth rate to 4.6 per cent — one of the best in the last four years. Likewise, balance of payments (BoP) recorded a surplus of Rs 127 billion and foreign reserve swelled by 61.5 per cent to Rs 439.46 billion. 

“Banks are ready to extend loans but the demand side for credit is docile at present, as borrowers are not ready to risk investments as profit is not guaranteed in the current situation,” pointed out Dr Dahal, who is also the chairman of Mega Bank.

The perennial power shortage has not only discouraged large scale manufacturing and industrial companies, but the cost of production for even small and medium enterprises has escalated, deterring them from investing. 

In addition, the consistent political drama has put off budding entrepreneurs into venturing into new projects. 

Moreover, inelastic lending interest rate irrespective of the amount of liquidity with financial institutions is another factor that is deterring potential borrowers.

Though financial institutions have started reducing the interest rate –– both in deposits and credit –– potential borrowers have still not come forward.

Source: THT