KATHMANDU, NOVEMBER 1
The high interest rate on borrowing has hit the country's industries while also affected the overall economic activities.
The cost of operating businesses and industries has increased, affecting prices and demand of the products, insiders say.
Industrialists say interest rates have doubled in over a year, posing one of the biggest challenges and crises for industries.
"With an increase in capital, the cost of production rises. Inflation is already taking a toll on the economy. Industries are having a hard time dealing with the rise in production costs as demand continues to remain low in the market due to the liquidity crunch. Demand for produced goods from domestic industries has also declined by 50 per cent adding further woes to industrialists. The movement of consumers in the market during the festive seasons and their purchasing power have dropped to an alltime low," Rohit Gupta, vice-president of Confederate of Nepalese Industries, told The Himalayan Times.
He also shared that CNI had held talks with government bodies and authorities of Nepal Rastra Bank (NRB) to ease the situation but no action has been taken so far.
Similarly, Dinesh Shrestha, vice-president of the Federation of Nepalese Chambers of Commerce and Industry emphasised the grave situation of the country's economy is due to the increasing interest rates.
"At present, industries and traders are facing huge challenges and are on the verge of holding protests. However, we want to raise our issues with the government through proper diplomacy. Banks should provide loans at an interest rate of single digit for industries and a maximum of the lower two digits for businesses. Industrialists are dissatisfied with the silence from authorities concerned and the Department of Industry," he said.
Keshav Acharya, an economist, said that the increase in interest rates is a global phenomenon at present. Banks across the world are aggressively increasing interest rates to address the rising inflation and halt the depreciation of their currency.
"In mid-July, the NRB introduced a new monetary policy which is more strict than the past two years. The NRB increased Cash Reserve Ratio (CRR), and Standard Liquidity Facility. However, the mismatch in demand and supply in the market was sure to lead to a hike in interest rates. The deposits have failed to keep pace with the surge in credit demand, leading to a hike in interest rates. To increase deposits, banks have increased interest rates on saving and fixed deposits," Acharya said.
Stating that banks collect cash through SLF and the repurchase agreements issued by the NRB to address the liquidity crunch in the market, Acharya reiterated that these provisions are temporary solutions while the demand for loans is a long-term issue. The NRB cannot infinitely supply the demands, leading to a hike in interest rates and angering the private sector.
At present, about Rs 500 billion to Rs 600 billion is in circulation. Even if 50 per cent of the in-circulation money goes to the banks, the problems will be solved. However, the reason for low deposits can be attributed to the use of borrowed money in non-productive sectors that were given to invest in the manufacturing and production sector.
To ease the situation, the government should lower the remittance proportion coming from the informal sector and shift them through the formal sector, as per Acharya.
Also, the NRB should compromise on policy rates and reduce CRR which can enable banks to increase their loanable funds. Although the treasury position of the government is tight, it can still aggressively spend the capital budget to ease the current situation.
However, the low spending by the government so far into the current fiscal year will not provide any solution. The government, NRB, and the private sector must come up with ideas to deposit the cash which is in circulation and is invested in the non-productive sector, he opined.
Following the liquidity crunch and depleting foreign reserves of the country, the central bank aggressively increased interest rates and tightened lending to control inflation and ease the liquidity situation of the country. However, the increasing cost of borrowing has affected industries and businesses, leading stakeholders to warn of protests if banks continue to hike interest rates on loans aggressively.
According to NRB, interest rates had to be increased to control deficits in the country's balance of payments and depleting forex reserves as a result of the global economic condition. Gunakar Bhatta, spokesperson for NRB, said that the central bank is making efforts to control the increasing interest rates. "We have reduced the interest rates on loans taken by an institution by two per cent compared to the loans taken by individuals to reduce excessive hike of interest rates as 45 per cent of our depositors are institutions.
We are focused on balancing our internal and external sectors at the moment," Bhatta said.
He also said that the NRB has directed banks to decrease the premium imposed forcefully on loans. "Banks are in the process of reducing the premiums," he added.
A version of this article appears in the print on November 2, 2022 of The Himalayan Times.
