Nepali banks should consider implementing gradual cost-cutting measures to alleviate concerns surrounding rising borrowing costs. By proactively adjusting lending rates, they can help maintain economic stability
In the realm of economics, the interplay between credit and growth is a fundamental aspect often scrutinised by policymakers and economists alike. Understanding how credit, particularly from banks, contributes to economic growth, especially during periods of recession, is paramount for steering economies towards stability and prosperity. As the world grapples with economic uncertainties, the role of banks in facilitating growth warrants closer examination.
Aggressive lending, which leads to a surge in non-performing loans (NPLs), is widely recognised as one of the root cause of financial crises. In response to an anticipated mild recession in 2001, the Federal Reserve, the central bank of the USA, drastically reduced the Fed Rate from 6.5 per cent to 1.75 per cent between May 2000 and December 2001. This move encouraged subprime consumers to take advantage of cheap credit, resulting in a significant increase in subprime mortgages from about 2.5 per cent to nearly 15 per cent of all home loans by 2007, and resulted in the great economic recession of 2007-2009 in the US.
Banks played a crucial role in overcoming the Great Recession of 2007-2009 in the USA. Initially, many banks faced severe financial distress due to the collapse of the housing market and the subsequent decline in the value of mortgage-backed securities. To stabilise the banking sector, the government intervened with bailouts and liquidity injections, ensuring that financial institutions remained solvent and could continue lending. As the economy gradually recovered, banks played a key role in providing credit to businesses and consumers, supporting economic growth and stability. Overall, the resilience and cooperation of banks were essential in navigating the challenges of the Great Recession and facilitating the recovery process.
The 1973–75 English secondary banking crisis happened because real estate and securities firms borrowed too much, and when property and share prices fell due to the 1973 oil crisis, they couldn't pay back. The decisive action by the Bank of England to organise a "lifeboat fund" amounting to 1.2 billion (euro) jointly with the strong clearing banks, contained the problem.
Economic crisis in middle-income countries like Thailand, the Philippines, Malaysia and Colombia stemmed from over exuberant lending during commodity booms, political interference and concentration of loans in specific sectors like real estate (1989-1990). Strong corrective measures and tighter bank supervision in Thailand and Malaysia aided rapid recovery amidst high economic growth, with central banks critical roles in providing liquidity and financial support during the crisis.
In line, Nepali banks should consider implementing gradual cost-cutting measures to alleviate concerns surrounding rising borrowing costs. By proactively adjusting lending rates, they can help maintain economic stability amidst potential challenges, ensuring sustainable growth and resilience in the face of evolving market dynamics. Financial development, characterised by the availability of credit, plays a dual role in fostering economic growth. In the short term, increased access to credit fuels economic activity, while in the long run, sustained growth supports further financial development.
It is essential to differentiate between business credit and retail credit concerning their impact on the economy. Business credit, by increasing the supply of capital to enterprises, stimulates production and investment, thereby bolstering overall economic output. On the other hand, retail credit, which fuels consumer spending, stimulates demand, thus driving economic growth through increased consumption.
During recessions, the significance of bank credit becomes even more pronounced. As businesses face tightening liquidity and consumers curtail spending, the injection of credit by banks can provide much-needed liquidity to stimulate economic activity. However, concerns linger over the rising borrowing costs.
The survey presented on January 10, 2024 gathered insights from over 1,200 executives, including 630 CEOs, who shared their perspectives on the top business threats and opportunities for 2024.
Participants hailed mainly from the United States, Latin America, Japan and Europe. A notable finding was that 27 per cent of global CEOs expressed preparedness for a recession. A significant concern highlighted was the rising borrowing costs of banks, which could elevate the overall cost of funds.
Monetary policy illuminates that the market supply chain disrupted by the COVID-19 pandemic and the Russia-Ukraine war is yet to come in normal order. There is higher inflationary pressure in both developed and developing countries. The price of gold is skyrocketing; history shows, the price of gold hikes before inflation or uncertainties in the economy. Petroleum and food prices has been improving slowly, but the overall inflation level is still much higher than their targeted level. As a consequence, majority of the central banks have been continuing the tight monetary policy stance; pressure in the financial sector of both emerging and developing economies still continues.
Although Nepali banks have provided various support measures, such as interest rebates, penal waivers, subsidies, restructuring facilities and rescheduling facilities amidst the COVID-19 pandemic, they must employ additional tools to stimulate economic activities. This could entail further initiatives such as facilitating easier access to credit for businesses, implementing targeted lending programmes for sectors hardest hit by the pandemic, enhancing digital banking services to promote financial inclusion, and collaborating closely with the government and other stakeholders to address broader economic challenges. By adopting a multifaceted approach, banks can play a pivotal role in revitalising the economy and fostering sustainable growth in Nepal.
