The banking sector regulator’s call to reduce auto lending has emerged as a double-edged sword, as it is expected to not only reduce credit flow towards the unproductive sector, but hit the government’s revenue collection as well.

A fall in auto loan will automatically suppress demand for automobiles, as over 90 percent of vehicles that ply on the roads are financed by banks and financial institutions. This will then reduce vehicle imports, which make a huge contribution to the government’s tax receipts.

“It is still not clear whether banks have reduced auto sector lending. But if that has happened, it’ll take a toll on the automobile sector,” Anjan Shrestha, president of the Nepal Automobile Dealers’ Association (Nada) said, adding, the auto sector contributes around Rs40 billion to the state coffers each year.

Nepal Rastra Bank has recently asked banks and financial institutions to follow prudent banking practices and reduce exposure towards unproductive sector, including automobile. The call was made after the banking sector witnessed a severe shortage of funds that could be immediately extended as loans.

Lately, many banks and financial institutions are facing severe shortage of loanable funds because of mismatch in deposit collection and credit disbursement. The country has lately witnessed slowdown in deposit collection due to deceleration in remittance inflow, while demand for credit has gone up since the Indian trade embargo was lifted.

After the trade blockade came to an end, demand for vehicles has surged. The demand has also been fuelled by attractive schemes launched by automobile traders. This has generated opportunity for banks and financial institutions that have very few avenues to channel credit because of not-so-favourable investment climate in the country.

Banks and financial institutions disbursed Rs26.2 billion in hire purchase loans, most of which goes for vehicle purchase, in the first five months of the current fiscal year, shows the latest Nepal Rastra Bank report. Banking institutions extended Rs2.8 billion in hire purchase loan in the same period a year ago.

As banks are offering easy auto loan facility, more and more people are contemplating on fulfilling their dream of owning a car, prompting vehicle imports to surge. This, in turn, has helped the government to earn more in customs duty receipts.

The government’s customs duty collection surged by 101.8 percent to Rs55.5 billion in the first six months of the current fiscal year, largely because of jump in imports, including automobile. Imports of vehicles also make a big contribution to value added tax and excise duty collection.

According to the data of the Nepal Rastra Bank, vehicles and spare parts account for 10 percent of total imports of the country. “Control in auto sector lending may even prevent the government from achieving this fiscal year’s economic growth target of 6.5 percent,” Shrestha said.

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