However, the credit expansion to the private sector during the first half of the current fiscal year is far less than what the BFIs lent during the same period last fiscal year. BFIs' lending to the private sector had grown by Rs 492.63 billion in the first six months of the previous fiscal.
Along with the lending, deposit collection also surged in the Poush. Of the Rs 215.14 billion deposit growth in the first half of the current fiscal year, Rs 104 billion was recorded in Poush which also helped BFIs increase lending. Bankers, however, are not sure whether the rise in lending will continue in the coming months. “We are in a comfortable position in terms of investment-grade liquidity now and we are capable of lending to a certain extent. But we have not seen large-scale demand for credit in the last two weeks which gives to the suspicion that the loan demand seen in Poush may have fizzled out," the banker said. Businesspersons have been complaining about the weak market demand for goods and services in recent months which has forced them to reduce production. With industries running at low production capacity, the power demand from the industrial sector has also been decreasing, according to Nepal Electricity Authority. "If the government speeds up construction activities, demand for credit from the construction material industry may rise,” said the banker. However, the government is planning to cut the financing for construction projects in the wake of the resource crunch. The high-interest rates could also contribute to lower demand for loans, according to bankers. The private sector has been demanding that interest rates need to be lowered as the average interest rate of loans was 12.79 percent in January, which is the highest in the last two and half years. But BFIs are unlikely to reduce lending rates significantly because of the high cost of funds. The high cost of funds is because the majority of their source of funds is reliant on fixed deposits for which they have to pay higher interest. As of mid-January 2023, the share of fixed deposits in total deposits of banks and financial institutions stood at 60.4 percent. When it comes to categories of banks and financial institutions, finance companies have been heavily reliant on fixed deposits. Finance companies and development banks are more reliant on fixed deposits. The share of fixed deposits in finance companies stood at 72.96 percent while the share in development banks stood at 69.33 percent and 58.22 percent in the case of commercial banks, during the first five months of this fiscal, according to NRB. “Liquidity in the financial system remains vulnerable as long as they reduce the composition of fixed deposits to around 40 percent,” another banker said. “It is because if a large institutional depositor withdraws money, investment-grade liquidity will decrease significantly.”
