Cheaper Interest Rates Fail to Spur Credit Demand: Energy and Construction See Growth While Agriculture and Consumption Shrink

Despite a massive accumulation of loanable funds (liquidity) in banks and financial institutions leading to a continuous decline in interest rates, credit demand in the market has yet to gain momentum. According to general economic principles, cheaper interest rates should stimulate borrowing. However, data from Shrawan, the first month of the current fiscal year, paints a contradictory picture. According to the Nepal Rastra Bank, while the weighted average interest rate on commercial bank loans dropped in Shrawan compared to mid-Ashad, the total credit flow actually recorded a slight, negative decline. This clearly indicates that the primary challenge in the market is not a shortage of capital, but rather a sharp drop in investor and consumer confidence.

Central bank statistics show that the weighted average interest rate on local currency loans from commercial banks stood at 6.55 percent in mid-Ashad, which eased to 6.48 percent by the end of Shrawan. Yet, this cheaper interest rate offer failed to entice borrowers. Total local currency credit, which was Rs 5,196.46 billion in mid-Ashad, shrank by approximately Rs 480 million to settle at Rs 5,195.98 billion in Shrawan. The stagnation in overall credit volume exposes the reality that merely slashing interest rates does not automatically trigger an investment appetite across all sectors of the economy.

While the overall credit size remained stagnant, sectoral trends reveal an interesting shift in investment patterns. Credit demand has visibly increased in long-term infrastructure and productive sectors. In Shrawan, loans to the electricity, gas, and water distribution sectors grew by about Rs 4 billion, reaching Rs 507.81 billion, carrying a relatively low average interest rate of 6.38 percent. Similarly, bank investments expanded in construction, non-food manufacturing, and the hotel and restaurant sectors. Taking advantage of a moderate interest rate (6.92 percent), public attraction towards residential home loans up to Rs 2 million and real estate loans also witnessed moderate growth. Working capital loans, essential for daily business operations, grew from Rs 853.29 billion to over Rs 863.42 billion.

Conversely, the agriculture sector—considered the foundation of the economy—and consumption loans, which reflect citizens' purchasing power, experienced significant contraction. Compared to Ashad, agriculture and forestry loans shrank by roughly Rs 4 billion, coming down to Rs 297.65 billion. The downward trend was also mirrored in aquaculture and other agricultural production sectors. Most concerning is the decline in 'consumption loans,' which constitute a massive portion of bank investments. This category fell from Rs 1,147.51 billion to Rs 1,142.12 billion. The decline in consumption loans, which carry a comparatively higher interest rate (7.25 percent), underscores a drop in the purchasing capacity and willingness of the general public, directly impacting aggregate market demand.

Capital market investors also appear hesitant to leverage the cheaper interest rates. Despite margin nature loans against shares being offered at a cheaper average rate of 6.36 percent, the volume of such loans decreased by Rs 120 million in a single month, dropping to Rs 143.02 billion. This confirms that investors are still in a "wait and see" mode, reluctant to take on banking risks to invest in the stock market.

Analyzing the nature of the loans, term loans—used primarily for business expansion—hold the largest share and continue to grow. In Shrawan, term loans crossed Rs 1,910.96 billion. However, short-term credit facilities like cash credit and overdrafts shrank. Looking at the interest rate structure, deprived sector loans boast the cheapest rate at 5.53 percent, while 'other production' loans remain the most expensive at 7.30 percent. Although loans to local governments carry a rate of just 3.50 percent, their overall market impact is negligible due to their small volume.

This overarching scenario demonstrates that while there is absolutely no scarcity of resources for lending within the banking system, the market is suffering from a severe drought of 'quality and reliable' credit demand. Although the growth in energy, construction, and real estate loans provides a positive signal that certain economic components are trying to move, the decline in agriculture and consumption highlights deep-seated structural weaknesses in the economy. The current necessity goes beyond simply advertising cheaper bank interest rates; it demands urgent policy reforms and the creation of a conducive business environment to restore the lost confidence of entrepreneurs and the general public.