February 11: Credit flow of banks and financial institutions to the unproductive sector has started increasing after the demand for credit from the manufacturing industries and for infrastructure development declined due to the impact of COVID-19. 

According to Nepal Rastra Bank (NRB), flow of consumption loans from banks and financial institutions have increased by 440 percent till mid-January of the current fiscal year. 

The bank had disbursed consumption loans of Rs 119.52 billion till mid-January 2020. However, the loan flow under this heading reached Rs 823 billion in 2021. This is 17.65 percent of the total investment of banks. As of mid-January this year, banks and financial institutions have disbursed a total of Rs 466.16 billion loan. 

Banks and financial institutions have been providing consumer loans against gold and silver and debentures. Such loans are also issued to fixed deposit account holders. Similarly, they have been investing in credit cards and other headings as well. 

BFIs have invested Rs 78.39 billion in debenture securities, Rs 48.40 billion against collateral of gold and silver, Rs 36.83 billion issued for fixed deposit receipt holders and Rs 3.09 billion for credit cards.  

Consumers do not have to disclose the purpose when taking a loan under the consumer heading. The common people have been taking consumer loans to meet their daily needs including household expenses. 

Chairman of the Nepal Bankers' Association and Chief Executive Officer of the Agricultural Development Bank, Anil Kumar Upadhyaya, said that the growth of consumer credit was high due to low credit flow in industry and businesses. “The demand for loans in the manufacturing sector has declined due to the pandemic,” he said, adding, “This is why the growth rate of consumer credit has been high.”  

The credit flow from banks to the construction sector has also decreased since mid-January 2021. Compared to last year, the credit flow to this sector has decreased by 48.08 percent. Apart from this, credit flow to other productive sectors has also declined. Credit flow of banks in the agricultural sector increased by 13 percent in 2021.

Experts say that increasing investment in unproductive sectors such as consumer needs is risky while the credit of banks and financial institutions should flow into the productive sector and contribute to production, employment and overall economic growth.