A LEADING national daily on Saturday reported that the scheduled banks cut rates of interest on lending in September as the businesspeople continued to show reluctance in taking for loans from the banking sector due to sluggish business trend caused by longstanding political uncertainty and infrastructure deficiencies.
The central bank data stated that the banking sector on September declined the average interest rate on lending to 11.48 percentage points from 11.51 percentage points in previous month. Amidst the distressed business climate, the cutting of the interest rate is seemingly a nudge to fuel business development but many other factors such as political instability, lack of good governance, sense of insecurity, red-tape, lack of electricity and gas connections, and many other infrastructural deficiencies still exist as hurdles.
The central bank admitted that the lending rate in the banking sector maintained the downward trend consecutively as the banks are compelled to decrease the rate due to a sluggish credit demand from the businesspeople. The weighted average interest rate on lending continued to decline in the recent months as it was 11.57 percentage points in July, as opposed to 12.32 percentage points in January.
The weighted average interest rate on deposits had also decreased to 6.66 percentage points in September from 6.74 percentage points in August. But the interest spread rate, the gap between the interest rates on credit and deposit, stood at 4.82 percentage points in September which was 4.77 percentage points in August, meaning that the profit margin of banks has increased.
Majority of the banks had recently cut their interest rates both for deposits and lending as they are now facing dull business amid no signs of an improved political situation. The country’s businesspeople have adopted a ‘wait and see’ approach towards expanding their activities by taking loans from the banks due to the sluggish business trend. Due to the lower credit demand from the industrial sector, the banks are now facing huge excess liquidity forcing them to rush for the government treasury bills and bonds.
Interest rates on all types of treasury bills and bonds dropped in recent months as most of the banks submitted high value bids at the central bank’s auction for the government tools to invest their idle funds.
Due to the lower credit disbursement, the banks also cut the rate of interest on deposits to discourage the depositors so that banks get a respite from the burden of paying the interest. The banks cut their rate of interest on lending over the years to encourage the entrepreneurs but their feedback has yet to reach a satisfactory level. A single digit interest rate is helpful for doing business though the current interest rate is far from being at the optimum level. But low interest on lending is not the only factor affecting business. The government must ensure the other determinants of business like restoration of good governance, democracy, political stability and a business friendly climate.
