September 13: Banks and Financial Institutions had been experiencing a contraction in their flow of loans over the past one and a half months but, there has been some improvement during the prohibitory order period. Nepal Rastra Bank expects further improvements in the credit flow because of the new fixed interest rate policy.

The net credit flow of the 27 commercial banks had decreased by Rs 25 billion  in the month of Shrawan (mid-July to mid-August). However, loans worth Rs 19 billion were distributed as of last week (September 4). Nepal Bankers’ Association informed that the credit flow that had improved in the month of Ashad (mid-June to mid-July) had become negative in the month of Shrawan (mid-July to mid-August). According to the Association, the net flow of loans had reached Rs. 2,903 billion after the disbursal of Rs 87 billion in the month of Ashad (mid-June to mid-July). However, the net amount totaled to Rs. 2,878 billion after it decreased by Rs. 25 billion in the month of Shrawan (mid-July to mid-August).

The market has had a liquidity of more than Rs 200 billion since the last few months because of the contraction in the credit flow. Dr Gunakar Bhatta, the spokesperson for Nepal Rastra Bank, said that in order to manage the liquidity in the market, the central bank has introduced policies that will encourage the debtors to get new loans. Rastra Bank has also increased the limit on current loans to enable the businesses affected by coronavirus to pay for their expenses like salaries, rents, etc. In addition, a policy has been introduced to stabilize the rate of interest on loans.

Banks and financial institutions are not permitted to increase the interest rates on personal term loans like auto loans and home loans for at least a year. Previously, the interest rates used to change with the change in the base rates of the banks in every quarter. Loans taken at the rate of 8 percent in the beginning would reach as high as 13 percent by the end of the year.

Spokesperson Bhatta firmly believes that this provision made by the central bank will definitely increase the demand and the flow of loan in the market.

“There is a provision that prohibits banks from increasing the interest rates on personal term loans. This will give the customers a sense of relief for a year. This will also increase the demand of debt,” he said. He also said that the economy will improve with the increase in the credit flow.

Bhuwan Kumar Dahal, the Chairman of Nepal Bankers’ Association, says that the coronavirus pandemic and the lockdown affeted the overall banking sector negatively. The Credit to Core Capital plus Deposit ratio (CCD) of the banks is currently in a bad state because of the lack of new loans.