High interest rates make life hard for businessesWhen faced with a shortfall of loanable funds, banks raise the deposit interest rates to encourage people to increase their deposits, report says.
Anish Bir Singh Kansakar, proprietor of Sagun Export Nepal which produces and exports felt products, pashmina shawls and handmade knitwear, saw his business plunge during the Covid lockdowns.
It has been a year since Kansakar started making some semblance of recovery, and then something else came that wiped the smile off his face. High interest rates gave his teetering business another blow.
“Any increase in interest on loans decreases the profit margin, and hurts the overall business,” said Kansakar, who exports most of his products to Australia.
"The cost of production has risen. If the interest rate doesn’t come down, businesses will have a hard time. I will have to lay off staff and slash orders for raw materials,” he said.
“We quote a certain price to our international clients, and we cannot change it every time the interest rate changes,” Kansakar said.
Banks have increased the interest rate three times in the past year. Bankers say rising interest rates is a global phenomenon.
According to Umesh Prasad Singh, president of the Federation of Nepalese Cottage and Small Scale Industries, many small and medium enterprises have been pushed to the brink by increased interest rates just as they were emerging from the pandemic.
“Around 80 percent of the small scale factories are running on loans from banks; and with the hiked interest rate, they are not in a situation to pay them back,” Singh said.
"Only 30 percent of them are in operation for lack of finance and high interest rates, and they will gradually shut down too. When it is already difficult to get loans from banks, the sharp rise in interest is not normal," Singh said.
“We have launched a protest against high interest rates in Rupandehi by refusing to make interest payments and take new loans, and it will go nationwide soon. The interest rate needs to come down to single digits. We will not accept the new interest rate at any cost," he said.
"The Finance Ministry and Nepal Rastra Bank should have taken things in hand instead of giving private banks free rein to decide the interest rate. A sharp rise in interest is not good for small scale businesses which make a significant contribution to the economy."
Banks say they have their own problems.
"Interest rates have increased due to the global economic situation, inflationary pressure, import-based economy and the strengthening of the dollar," Anil Kumar Upadhyay, president of the Nepal Bankers’ Association, told the Post in a recent interview.
“The liquidity crisis is another reason for increasing the system cost of banks that are maintaining it by borrowing from the central bank, and the price needs to be transferred somewhere.”
Singh says it is wrong to increase the interest rate so steeply when Covid-hit businesses are having to deal with inflation due to high fuel costs caused by the Russia-Ukraine war.
"Even though refinancing service has been inserted in the monetary policy, small entrepreneurs are still to benefit from the scheme. An increase in the interest rate disrupts the entire production cycle from raw materials to sales," Singh said.
Economist Raghubir Bista said a hike in interest rates obviously means high operating costs, creating a tough survival situation for micro, cottage and small scale factories.
“The government is totally occupied with the upcoming elections, and the economy is not on the agenda at the moment. It will be a long time before a new government is formed and it gets to work. So the hard times will continue unless interest rates fall automatically,” Bista said.
Nepal Rastra Bank raised interest rates in February and July 2022 in a bid to reduce demand for credit.
A World Bank report stated that in a liberalised market, when faced with a shortfall of loanable funds, banks would be expected to raise the deposit interest rates offered to the public to encourage them to increase their deposits.
According to the 2018 National Economic Census, there were 923,356 establishments operating in Nepal, roughly half of which were registered. Among them, micro, small and medium enterprises account for 69.3 percent, 25.2 percent and 5.5 percent respectively. They employed 2.74 million people,
Only 35.5 percent of the micro, small, medium enterprises have access to credit.
According to a Nepal Rastra Bank report on financing of small and medium-sized enterprises in Nepal, small enterprises borrowed from Rs1 million to Rs5 million, and medium enterprises took loans ranging from Rs5 million to Rs150 million.