Nepali banks are in a bit of a tricky situation. They’ve dropped their interest rates, loosened up their loan terms, and are practically swimming in cash. Yet, they’re earning less from loans than last year. If that sounds like “bank issue” only, don’t worry—it’s actually a clue to the bigger picture of what’s happening in Nepal’s economy. 

Banks don’t just make money appear out of thin air. They lend out money and earn interest, which keeps them, and the economy, humming along. So, ideally, if businesses in Nepal do well, so will the banks. But now, borrowers seem scarce, businesses are cautious, and banks are stuck with cash waiting to be borrowed. So, what’s going on?

Here is What’s Happening!

To put it simply, banks are making less money on loans than they did last year. According to financial reports of various commercial banks, the net interest earnings of 20 big Nepali banks dropped by 6.09% from Rs 49.57 billion last year to Rs 46.55 billion between Shrawan and Asoj  2081. And it’s not that they do not have money to lend. In fact, they have more than they can lend. 

They’ve got plenty of cash, Rs 5.903 trillion in deposits. But only Rs 4.664 trillion of it is actually out there in loans. That leaves around Rs 90 billion in “extra” funds—referred to as ‘liquidity’, which are just waiting for borrowers.

But despite some banks dropping interest rates to as low as 5.71%, people and businesses are still hesitant to borrow. Instead of seeing all this low-interest money as a great deal, they’re keeping their distance. And that’s unusual because usually, lower interest rates should mean more borrowing.

But Is It Just The Excess Liquidity?

Well, there is something more to it. Or rather say, another thorn in banks’ sides right now! The rise in bad debts. "Bad debt" is just a fancy way of saying someone’s not paying back their loan, and it’s now making up 3.71% of all loans, up from 3.53% last year. 

When this happens, banks have to set aside funds as a safety net for these unpaid loans, a process known as “provisioning.” And here’s the kicker: that money is essentially locked up, meaning banks can’t use it to make new loans or invest elsewhere, which drags down their profits.

Most banks felt the pinch—Agriculture Development Bank, for instance, saw earnings take a whopping 25.18% dip. But there was one bright spot: Prime Commercial Bank managed to buck the trend with a 16.67% boost in earnings, showing that not everyone’s stuck in the same rut. But overall, 14 out of 20 banks have watched their earnings decline due to the rise in bad debts and slowing loan demand.

Why This Matters to You, Me & Everyone

You might wonder, “Why should I care if banks aren’t lending as much?” Good question! When banks lend less, it usually means businesses and individuals aren’t expanding, buying, or investing as much as before. And that can have a ripple effect. When companies and entrepreneurs feel cautious, they cut down on hiring, hold off on big projects, and save more instead of spending. In the long run, it could mean fewer job openings, reduced consumer spending, and a less vibrant economy overall.

The Nepal Rastra Bank (NRB), in a bid to turn things around, has stepped in to make borrowing more attractive. The big question is: will it be enough to give people the confidence to borrow again and, by extension, revive the economy?

Central Bank’s New Policies to Help Out

The central bank isn’t just sitting back. It’s tried to make things easier for banks to lend by rolling out new policies. One of these is aimed at the construction sector, which often takes on big loans for long-term projects. Now, construction companies have until November 2024 to make their payments, giving them a bit more breathing room. Plus, the NRB lowered the required safety net for good loans from 1.2% to 1.1%.

But wait—why do banks need to set aside any safety net for “good” loans? Well, even solid, reliable loans can have an element of risk. So, the central bank asks banks to reserve a small amount just in case. Think of it like putting a little cash aside for emergencies, even if you’re pretty sure things will go smoothly.

A Surprising Twist: Lower Interest Earnings But Still Higher Profits!

Despite all the challenges, here’s something unexpected: the banks still managed to raise their overall profits by 20.17%, reaching Rs 16.18 billion in the first quarter. How? They owe a lot of this success to NRB’s relaxed rules, which allowed banks to worry less about certain loan risks and requirements. So while the income from loans has dropped, other eased regulations have helped keep profits up. And the million dollar question: Are these only book profits or actual cash profits?

What’s Next?

For now, banks are focused on sorting out their current loans, especially ones that aren’t being paid on time. Instead of aggressively pushing out new loans, they’re working to recover what they’re already owed and beef up their finances. The NRB’s measures and lower interest rates are meant to nudge the market back into borrowing mode, but it’s still uncertain if businesses and individuals will take the plunge.

To sum it all up, Nepali banks have plenty of cash and lower rates but face low loan demand and rising bad debts. They’re relying on policy tweaks and cautious management to get through these rough waters, but whether that will be enough to restore a lively economy and get borrowers back in the game is anyone’s guess. For now, it’s a waiting game for banks and the economy alike—hoping that Nepal’s cautious borrowers will eventually come around.