There is no sign of credit rates coming down… banks are becoming richer, but businesses are suffering

• Shekhar Golchha, Senior vice-president, FNCCI

Kathmandu, June 8

It’s the second week of June, the time of the year when government spending starts gathering pace, raising deposit level at banks. This is also the time of the year when banks put the brakes on lending, as books must be closed in mid-July when the fiscal year ends. This combination of higher deposit inflow and low credit disbursement generally exerts downward pressure on lending rates.

This year too deposit stock has gone up and credit growth has slowed. Yet sky-high lending rates have not come down, disappointing borrowers, especially businesses.

In about one-month period till June 1, commercial banks collected Rs 62 billion in fresh deposit and disbursed Rs 50 billion in loans, shows the latest report of Nepal Bankers’ Association.

Deposit raised in the one-month period accounted for 25 per cent of the deposit collected by banks in the 10-and-a-half-month period since mid-July when the fiscal year began. This shows deposit collection has lately gathered pace. On the other hand, loans released in the one-month period accounted for 15.5 per cent of the total credit disbursement since mid-July. This means loans are not being issued as rapidly as in the previous months when credit disbursement had surpassed deposit collection.

The combination of higher deposit flow and lower credit disbursement, however, has not reduced lending rates. “And there is no sign of credit rates coming down,” said Shekhar Golchha, senior vice-president of the Federation of Nepalese Chambers of Commerce and Industry, the largest private sector umbrella body.

Commercial banks are charging interest as high as 24.7 per cent on loans, with Century Commercial Bank topping the list. Close on the heels are Mega Bank (22 per cent) and Nepal Bangladesh Bank (21.4 per cent). The maximum lending rate of nine other banks exceeds 18 per cent, an analysis of lending rates published on websites of banks shows.

“Can the economy afford such high-cost fund for rapid and sustained growth as envisaged by the government?” wonders Golchha, a leading industrialist.

Enterprises have long been complaining about high lending rates, which, they say, have inflated debt servicing cost. The businesses cannot transfer all of the additional cost to consumers, as they must keep prices competitive to gain an edge. This is squeezing their profits.

“So, banks are becoming richer, but businesses are suffering,” said Golchha, pointing to return on equities of Nepali banks, which stood as high as 39 per cent in the third quarter of this fiscal. “This is one of the highest in the world,” he added.

A number of bankers that THT talked to said lending rates were high because of ‘soaring credit demand’.

“One of the reasons for this is expansion in the base of borrowers,” said Himalayan Bank CEO Ashoke Rana. “In the past, many small businesses used to bank with smaller financial institutions. Today, many of them are our clients.”

But entrepreneurs such as Golchha cite ‘protection provided to banks’ as the main reason for runaway lending rates. “Look at the policy on interest spread, which allows banks to set lending rates by adding a premium of five percentage points to deposit rates,” said Golchha. “Also, nobody reminds banks to reduce lending rates even when it’s time to.”

Does the private sector think it has become the victim of regulatory capture — the tendency of regulators to act in the interest of businesses that they should be regulating? It’s not clear. But Golchha said, “The state must ensure equality of opportunity and healthy competition. Otherwise, businesses cannot survive.”

NRB Spokesperson Narayan Prasad Paudel said discussions were underway with representatives of the private sector and commercial banks in the run-up to the formulation of the new Monetary Policy. “I can’t say what the policy will include, but we are closely monitoring developments in the banking sector,” he said.

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Kathmandu, June 8

Nepal Electricity Authority may have finally declared that the country has become load-shedding free from May 14, but a World Bank study has revealed that between 2008 and 2016 the rolling blackouts cost Nepal’s GDP $11 billion.

NEA started enforcing power cuts from 2008 when the country’s demand for electricity surpassed the total supply. The problem peaked in 2016 with up to 14 hours of load-shedding in the dry season.

The study titled ‘How much has Nepal lost in the last decade due to load-shedding?’ has analysed the impact of load-shedding from 2008 to 2016. While the amount of GDP loss is almost equal to Nepal’s economy in 2008, if expressed in 2016 price using the corresponding GDP deflator values, the total GDP loss over the nine years amounts to a staggering $14.5 billion, according to the authors of the report.

The report states that the country lost more than six per cent of its GDP annually, on an average, during the review period. This means that if there had been no load-shedding, Nepal’s annual GDP would have been almost seven per cent higher as compared to what it was during the 2008 to 2016 period. Nepal was unable to meet, on an average, 20 per cent of its total electricity demand each year during the review period.

The drop in output could be witnessed across the board, as per the report. This was caused either by lack of power supply, especially for small- and medium-sized industries that could not afford backup power; or increased electricity costs, especially for large industries that could afford expensive backup generation.

The most notable impact was on investment, which was highly depressed due to lack of reliable electricity supply. For example, if there had been no load-shedding, annual investment, on an average, would have been 48 per cent higher than it was, says the study.

Due to the lower investment and production loss caused by load-shedding, total industrial output dropped by 6.9 per cent.

The study adds that load-shedding had also affected Nepal’s international trade during the 2008 to 2016 period, causing 2.8 per cent reduction of exports and 5.4 per cent reduction of imports.

This is because load-shedding causes the domestic production of goods and services to be more expensive,  and makes the country’s exports less competitive. Also, since load-shedding causes production activities to decline, input needed for production also declines.

One of the limitations of the study was that researchers could not encompass representing captive power, such as backup electricity, in an industry as it was not possible to extract that data from the existing data reporting system. Similarly, the study has not captured the effect of investment households had made in their backup systems, such as inverters, storage devices powered lighting devices. The implication of this limitation is that estimated impacts presented in the current analysis are higher than what it would be when impacts of backup power supply systems in both production sectors and households are accounted for, as per the report.