EDITORIAL: Lending bending

The central bank has desperately failed to keep lending rates in check, which is hurting the productive sector and country’s economy as a whole

The runaway lending rates of Nepali banks have hit the productive sector hard, affecting the overall economy of the country. On the contrary, banks seem to be having a good time even in the times of gloom. Commercial banks have been raising lending rates for the last several months, stating deposits have become expensive “due to deceleration in remittance inflow and slow public spending, especially capital spending”. As a result lending rates have gone unbelievably high – even up to 22 per cent. Though the Nepal Rastra Bank (NRB), the regulator, has said it intends to keep deposit rates within the range of seven to eight per cent and lending rates within the range of 12 to 13 per cent, interest rate on term and working capital loans has already breached the 13 per cent mark and is likely to hit 15 per cent soon. This clearly means banks are conveniently breaching the five per cent interest spread provision. The existing interest spread provision means a bank which has bought deposit at 11 per cent can sell it in the form of loan at 16 per cent.

The most common problem faced by the borrowers is the notice from banks about “revised interest rate”, which is always on the upward trend. Much to the chagrin of borrowers, especially those who float a loan to invest in the productive sector such as agriculture and manufacturing, banks often tend to hike the lending rates without giving prior information. This while increases borrowers’ debt servicing costs, it gives handsome profits to commercial banks. According to the unaudited financial statements published by 28 commercial banks in operation, their collective profit increased by 15.45 per cent to Rs 36.26 billion in the third quarter of the current fiscal compared to net profit of Rs 31.4 billion in the corresponding period of the previous fiscal.

The fundamental problem, however, lies with the central bank itself. When it comes to lending, the central bank has always echoed the government policy that credit should go towards the productive sector to raise domestic production, create jobs, bridge the ever-widening trade deficit and stimulate economic growth. But a big portion of banking sector loans is being used to purchase real estate, stocks and cars, which are considered unproductive areas. The productive sectors require huge chunks of capital to keep their business moving, but when lending rates continue to go up, the debt servicing cost eats into the profit, making it difficult for businesses to operate. This leads to layoffs, which again increase unemployment rate. The NRB, however, has failed to fix the situation. Interestingly, it has maintained silence over the rising lending rates. The regulator must act now, and to start with, it should reduce the interest spread. The Federation of Nepalese Chambers of Commerce and Industry’s earlier calls to this effect have fallen on deaf ears. For the country’s economy to grow, credit has to go towards the productive sector. It will be impossible for investors to explore new business avenues until lending rates are kept in check. The government also needs to find prudent ways to increase capital spending so as to bring lending rates down.

Airport in Kavre

The government is preparing to build a domestic airport in Kavre to ease increasing air-traffic pressure at Tribhuvan International Airport (TIA), which also operates domestic flights at various parts of the country. Minister for Culture, Tourism and Civil Aviation Rabindra Adhikari and Minister of State for Communications and Information Technology Gokul Banskota inspected two possible sites – Thulichaur and Nagidanda – in Kavre.

A feasibility study conducted in 2016 by the tourism ministry had found Nagidanda, located about 16km from the Capital, to be more feasible for an alternative domestic airport from where the east-bound domestic flights will be operated. The proposed new domestic airport in Kavre will have a 1,200-metre long runway. An estimated cost of around Rs 3 billion will be required to build it in four years. A six-member team of experts has already been formed. The team will recommend the best spot for the airport within a fortnight. Once it comes into operation, air-traffic congestion at the TIA will be relieved to a great extent. The number of air passengers is increasing by eight per cent annually, according to TIA officials.