Why is business community agitating against interest rates?

Kathmandu, Apr. 2

Interest rate in Nepal's financial sector soared during the pre-adversity period in the country, including the earthquake in 2015 and the coronavirus pandemic in 2020.

The average interest rate on credit was 13.6 per cent in July 2012 and 12.09 per cent in July 2013 which went down as low as 8.86 per cent in July 2016. The interest rate on lending hovered at 11.4 – 12.16 per cent from 2017-2019. According to the Nepal Rastra Bank (NRB), the interest rate on lending climbed to 11.62 per cent in July 2022 and 13.03 per cent in February this year.

But this time, the rise in the interest rate has caused a stir in the market and invited protests from the private sector businesses as well as the association like the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) and its associate organisations at the centre and districts.

In some cities, business community organised sit-in protests in front of the branches of banks and financial institutions (BFIs) and obstructed the service – which is categorised as the essential service and disruptions in it is prohibited.   

What caused the private sector to express ire against the BFIs at the time of economic slowdown and scarcity of funds to make investment in business projects and expansions?

Experts and industry insiders have different views to share.

While bankers tell that the ups and downs in the interest rates are simply because of the demand and supply as well as the availability of funds in the banking system, private sector blames the BFIs for cashing in on the crisis as an opportunity to charge high interest rate and 'premium'.

The business community also maintains that the BFIs registered good profits even during the financial slowdown in the last one and a half years.

President of Nepal Chamber of Commerce, Rajendra Malla, said to The Rising Nepal that the banking sector should have exhibited some mercy to the businesses. He criticised the high premium that the BFIs charged on the base rate which sent the interest rate as high as 18 per cent.

"This crisis was unforeseen. Therefore, BFIs should facilitate the businesses by locking up the premium on 2-3 per cent maximum," said Malla.

Businesses faced a hard time to manage the repayment of the principal and interest of their bank loans because their businesses shrank to the lowest in recent years. Currently, cement, steel and many other manufacturing industries are running at one third of their total production capacity. It means the businesses are earning less while the bank installment has gone significantly up. It is another matter of fact that a significant amount of loan is misused and channelised to unproductive sector like real estate, and stock market.

Amidst growing demand, the BFIs credit-deposit (CD) ratio reached up to 96 per cent resulting in a severe shortage of liquidity. It has now come around to 86.5 per cent.

As the government imposed a moratorium on the split of land plot, and share market crashed at the same time, the businessmen who obtained the bank loan in the name of business revival in the aftermath of the pandemic but invested in those sectors suddenly found themselves in the soup.

According to Malla, the market pessimism has its roots in abrupt cut of the COVID-related facilities to the business and sudden interest rate rise. "It is sure to crate lots of troubles for you when the interest rate goes up to 16-17 per cent from 7-8 per cent in a short span of time," he said.

Three years ago, the average lending rate was 8.43 per cent while it was 13.03 per cent this January.

However, Bhuwan Dahal, past president of Nepal Bankers' Association (NBA), said that the primary cause of the crisis was the shortage of funds, interest rate was a secondary one. "Shortage of money has broken the chain in the economy. As the developers of the projects and businesses couldn't get the money, producers of construction materials were also affected," he said.

In the first four months of the last fiscal year 2021/22, the BFIs had mobilised 50 per cent of the annual loan target, 19 per cent, for the private sector. According to the NRB report, on year-on-year basis, deposits increased by 17.2 per cent and claims on the private sector 31.2 per cent in the first four months of that year.

Meanwhile, the movement against the cooperatives and microfinance companies also fueled up the protests against the banks.

Dahal also agreed to the fact of banks being dishonest about the premium charged on the interest rate. "The central bank had allowed the BFIs to charge risk-based pricing on their loans but some misused it to favour their close ones," he said.

However, Spokesperson of the NRB, Dr. Gunakar Bhatta, said that the protests against the BFIs is rather a behavioural thing. "Most of the creditors thought that the interest rate regime would be stable. They couldn't think that there would be a pressure on liquidity and the rates would go up. This sudden rise in interest rates startled many," he said while maintaining that the central bank has forced the banks to lower the premium.

As a result, premium has come to an average of 5 per cent now from 8 per cent about three months ago. Dr. Bhatta said that the NRB was informed about the 'discriminatory behaviour' of BFIs in terms of premium.

But Dr. Bhatta said that possibilities of coming it down to 2.5 per cent anytime soon are bleak. "We have asked the banks to set the spread rate at 4 per cent by the end of this fiscal year. I think, it will also help to maintain the interest rate at comfortable number," he said. 

Published in The Rising Nepal daily on 3 April 2023.