Government Spending Key To Expedite Credit mobilisation

Commercial banks have been battling due to falling interest rates both on the credit and deposit. The fall in the rates, has shrunk the interest rate spread which could badly hurt its profitability. There are signs that the spread could shrink further, as the Nepal Rastra Bank (NRB) has directed the banks to bring back interest rates spread at 4 per cent. The falling interest rates is attributable to abundance of liquidity. During the liquidity shortage last fiscal year (FY), the interest rates shot up. Now the interest rates curve has turned downside as liquidity is high. The NRB data shows that the liquidity dipped to Rs 10 to 15 billion towards the end of 2022. Subsequently, the average lending rates of commercial banks shot up to 13 per cent in mid-March 2023. At that time, average rate on deposit rose to 8.37 per cent.

The surplus liquidity of Rs 69 billion noted on August 2023 is at present fluctuating around Rs 100 billion as of April 2024. Now, the average interest rates on lending of commercial banks has settled to 10.78 per cent as of mid-March 2024, and its average deposit rate is down to 6.74 per cent. The fall in the interest rates has shrunk interest rate spread of the commercial banks. In mid-March 2023, when the interest rates were seen on the top, their interest rate spread recorded 4.6 percentage point. The spread fell to 4.3 percentage point in mid-March 2024, when the interest rates fell. Noted economists, Kabi Raj Acharya and Surendra Kumar Vyas, studied that one percentage increase in interest rate spread increases earning per share (EPS) by 8.11 per cent. It indicates the sensitivity of change in the spread to EPS.

Private sector credit

Deposit is rising faster than the previous FY. The deposit went up by 7.6 per cent in the current FY due to massive remittance alongside narrowing trade deficit. The World Bank reported that the remittance inflow reached an eight-year high in first half of the current FY, driven by rising outmigration and currency depreciation. Meanwhile, private sector credit is up by 5.7 per cent only. The slow credit mobilisation plunged the interest rates as well as inter-bank interest rate. In the current FY, the interbank rate fell below the monetary policy target of keeping it above 3 per cent.

To lift the inter-bank interest, the NRB is moping liquidity from the financial institutions. In the current FY alone, it has injected Rs 562.6 billion and moped Rs 1159 billion. So, the time necessitates serious deliberation to find ways for credit mobilisation. A study based on the commercial banks data by the deputy governor Neelam Timsina showed that a growth in gross domestic product (GDP) causes the rise of private sector lending. Timsina's another study shows the growth of real private sector credit by 1 percentage point leads to increase of real GDP by 0.40 percentage point in the long term.

The evidence shows that the growth potential of GDP is imperative to accelerate the private sector credit in the short run which ultimately benefits GDP growth in the long run. Therefore, an optimistic growth trajectory is key to encourage private credit growth.

National Statistics Office's projection of real GDP growth of 3.54 per cent sparks a hope. Similarly, World Bank has predicted a 3.3 per cent growth rate for this FY, which was 1.9 per cent last FY. Meanwhile, it has emphasized that the growth will rely on the productive use of private sector credit, suggesting to focus on the service sector growth as the tourist arrival is going up.

Immediate measure

The encouraging tourists’ arrival is a good chance to enhance hospitality industry. The recent data of credit growth in hotel, tourism, entertainment industry inspires hope for investment opportunity. Here, the government must come forward with a policy to support this industry. In addition to the policy supporting the private sector, government spending is equally essential to boost private investment. A study of Associate Professor of Central Department of Economics, Ramesh Paudel, showed that gross capital formation is key to support sustainable growth. 

It has recommended for the government investment in education and health sectors to bolster holistic growth. The track record of the government capital expenditure, which is key to fixed assets formation, did not look exciting in the recent past. In the current mid-term review, the government has downgraded the projection of the capital expenditure to 84.13 per cent of the initial target. 

The interest rates has hit rock bottom. Despite the low rate, credit outflow has remained sluggish thus far. It has shrunk the interest rate spread and slowed down the economic growth. Here, the measure to boost credit is critical to lift interest rate. To boost the credit, the government policies to encourage investors specifically towards tourism and expediting capital expenditure mainly in education and health could be an immediate measure.

(The author is a journalist at The Rising Nepal.)