Credit growth dips due to quakes, protests in Tarai

In the period between July 17 and October 2, commercial banks extended only Rs 10 billion in loans, as against credit worth Rs 72.19 billion released in the first quarter of last fiscal

Kathmandu, October 15

Credit growth of commercial banks has fallen drastically so far this fiscal year, as the devastating earthquakes of April and May coupled with the protests in the Tarai have reduced demand for loans.

In the period between July 17 and October 2, commercial banks extended only Rs 10 billion in loans, show the latest data of Nepal Bankers’ Association. In the first quarter of last fiscal year (July 17 to October 17, 2014), these class ‘A’ financial institutions had released credit worth Rs 72.19 billion.

“Credit demand has fallen since the earthquakes hit the country,” said Sanima Bank CEO Bhuvan Kumar

Dahal. “And as the banking sector was making recovery from the devastating quakes, protests began in the Tarai which affected the investment climate.”

Commercial banks had deliberately reduced the flow of credit in the aftermath of the quakes, as risk perception was high in almost every sector ranging from construction and tourism to manufacturing. Banks had also introduced stringent conditions, like submission of building completion certificate, to sanction loans in the days following the quakes.

But the situation was gradually coming back to normal and demand for credit was moderately increasing. Then in mid-August, the Tarai protests began demanding changes in constitutional provisions.

Since then demand for loans has plummeted.

Demand for loans to finance trade generally goes up during August and September when importers start placing orders for Dashain, the biggest festival of Hindus in the country.

However, in these two months this year, letters of credit (L/Cs) worth a mere $377.19 million were issued, as against $1.04 billion in the same period last year, marking a drop of 63.73 per cent.

At the same time, demand for loans from other sectors also fell because almost every sector has been affected by protests in the Tarai and the fuel crisis.

For instance, almost all factories in industrial belts of Hetauda, Birgunj-Pathlaiya, Sunsari-Morang and Lumbini have remained shut, while hotels are reporting average room occupancy rate of 25 to 35 per cent in the peak tourist season. Similarly, agriculture sector is facing shortage of fertilisers and feeds, while construction sector, which needs diesel to run various machinery, has also been hit.

While demand for loans is falling, deposits have gone up by Rs 24 billion in between July 17 and October 2, largely because of the inflow of remittance.

This discrepancy in credit-deposit growth indicates income of commercial banks — which basically convert money received from depositors into loans to generate profit — will take a hit this fiscal year.