February 9: The growth rate of credit flow in the banking sector of Nepal has been higher than that of deposit collection. The annual growth rate of credit flow has been increasing every year compared to the growth rate of deposit collection.

According to a study conducted by the Confederation of Banks and Financial Institutions (CIBFIN), the growth rate of credit flow has been higher than that of deposit collection every year since 2070 BS except for FY 2076/77.

In FY 2069/70, deposit collection increased by 17 percent, while credit flow increased by 21 percent. Similarly, when the deposit collection increased by 21 percent in the last fiscal year (FY 2077/78), the growth rate of credit flow was 28 percent.

In FY 2076/77, the growth rate of credit flow was lower than deposit collection. While deposits increased by 17 percent that year, credit flow was only 12 percent. Loan flow had shrunk during that period due to the closure led by the Covid-19 pandemic.

Experts have said that credit flow has been higher than the accumulation of deposits every year due to the expanding economy. They opined that this was also the case because banks became more aggressive and increased lending.

Banking expert Analraj Bhattarai informed that increasing the flow of credit is good. "The way credit flows have increased confirms that the economy is expanding," he said. 

Low deposits on the other hand indicate that there aren’t adequate resources to expand the economy. At the same time, various other problems have also started appearing.

Bhattarai says that if the growth rate of loan flow and deposit collection continues to grow at the same proportion, it will be a challenge for banks to manage liquidity crisis in the coming days.

He said that the deposit collection could not increase as more credit has been flowed to the consumable sector. The loan disbursed from the bank comes back as a deposit in the bank after completing a certain cycle. As a result, it helps banks balance the credit to deposit ratio.

He said that banks and financial institutions and traders should exercise restraint in disbursing loans. 

"If that doesn't happen, the NRB should come up with a policy to control the flow of credit," he said.

Lately, the areas of deposit collection have expanded. The per capita income of Nepalis is increasing annually. The turnover and profit of business associations have increased. The salaries of government and private sector employees are also on the rise. The inflow of remittances also seems to have increased. Bhattarai says that even in that case, the lack of improvement in deposits is a matter of debate.

If this situation continues, it will be a challenge to meet the demand for loans in the coming days, he said. 

"During the same period, banks' paid-up capital have increased, and it became easier to meet the demand for loans. But, it seems to be a real challenge to meet the demand for loans in the near future,” he said.

Machhapuchhre Bank’s CEO Santosh Koirala informed that the demand for loan is rising recently. However, he said that there is a challenge to meet the growing demand due to low deposits.