One percentage point rise in flow of bank loans can push up country’s economic growth by 0.4 percentage point in the long run, says a latest study, which, according to experts, is ‘nominal and can be expanded’.
The study, conducted by Neelam Timsina, director at Research Department of Nepal Rastra Bank (NRB), is first of its kind in the country, which scientifically analyses the impact of private sector loans extended by commercial banks on the country’s economy in the long run.
Although the study titled ‘Impact of Bank Credit on Economic Growth in Nepal’ has proven for the first time the general notion that ‘rise in credit flow spurs economic growth’, experts are not thrilled about the impact of credit flow on GDP growth.
“The impact was not that substantial, which indicates credit is not being channelled towards the right direction,” Min Bahadur Shrestha, chief of NRB’s Research Department, said.
Although he didn’t say what should have been the ratio, he indicated the impact should have been bigger in a country where credit to the private sector has been growing rapidly.
NRB’s data show that commercial banks’ credit to the private sector expanded by around 14 per cent in first nine months of the last fiscal year to mid-January. In fiscal 2012-12, commercial banks’ credit to the private sector had gone up by 25.3 per cent.
In contrast, GDP is estimated to have grown by 5.15 per cent in fiscal 2013-14 — which ended on July 16 — and expanded by 3.46 per cent a year before that.
Although GDP growth estimate for fiscal 2013-14 stands at six-year high of 5.15 per cent, it was largely because of agricultural sector’s growth, which stood at an estimated 4.7 per cent in the last fiscal, as against 1.1 per cent a year before that.
In other words, better agricultural yield is main determinant of economic growth here, as it makes a contribution of 33.1 per cent to GDP. Yet, there is no way to link bank credit to higher agricultural growth, as it has so far only received 5.5 per cent of total loans extended by 30 commercial banks.
“So, more credit should be channelled towards sectors like agriculture, which directly helps attain higher economic growth,” he said.
Shrestha’s view is also shared by Timsina’s working paper, prepared using data of 1975 to 2013, which states: “To boost economic growth, private sector credit should be increased to productive sector.”
Talks about rapid credit expansion raise eyebrows in the west, where overflow of bank loans led countries to reel under financial and economic crises. In Spain, for instance, credit-to-GDP ratio jumped from 118 per cent in 1990 to 369 per cent in 2011 which induced troubles. In Greece, ratio rose from 33 per cent to 115 per cent between 1990 and 2011, which triggered an economic crisis.
However, the situation is totally different here, where credit-to-GDP ratio stood at 45 per cent in 2013, 41.2 per cent in 2012 and 40.3 per cent in 2011.
Earlier, in an interview with THT, Governor Yubaraj Khatiwada had said that the country has a lot of room to expand credit and the ratio could even be raised to 100 per cent of the GDP, if such loans are extended to the productive sector.
Central bank has asked commercial banks to divert 20 per cent of total credit towards productive sector by mid-July, 2015. But, banks have been able to channel only around 12 per cent of such loans to the sector.
source:RUPAK D SHARMA, The Himalayan Times,29 July 2014
LINK
The study, conducted by Neelam Timsina, director at Research Department of Nepal Rastra Bank (NRB), is first of its kind in the country, which scientifically analyses the impact of private sector loans extended by commercial banks on the country’s economy in the long run.
Although the study titled ‘Impact of Bank Credit on Economic Growth in Nepal’ has proven for the first time the general notion that ‘rise in credit flow spurs economic growth’, experts are not thrilled about the impact of credit flow on GDP growth.
“The impact was not that substantial, which indicates credit is not being channelled towards the right direction,” Min Bahadur Shrestha, chief of NRB’s Research Department, said.
Although he didn’t say what should have been the ratio, he indicated the impact should have been bigger in a country where credit to the private sector has been growing rapidly.
NRB’s data show that commercial banks’ credit to the private sector expanded by around 14 per cent in first nine months of the last fiscal year to mid-January. In fiscal 2012-12, commercial banks’ credit to the private sector had gone up by 25.3 per cent.
In contrast, GDP is estimated to have grown by 5.15 per cent in fiscal 2013-14 — which ended on July 16 — and expanded by 3.46 per cent a year before that.
Although GDP growth estimate for fiscal 2013-14 stands at six-year high of 5.15 per cent, it was largely because of agricultural sector’s growth, which stood at an estimated 4.7 per cent in the last fiscal, as against 1.1 per cent a year before that.
In other words, better agricultural yield is main determinant of economic growth here, as it makes a contribution of 33.1 per cent to GDP. Yet, there is no way to link bank credit to higher agricultural growth, as it has so far only received 5.5 per cent of total loans extended by 30 commercial banks.
“So, more credit should be channelled towards sectors like agriculture, which directly helps attain higher economic growth,” he said.
Shrestha’s view is also shared by Timsina’s working paper, prepared using data of 1975 to 2013, which states: “To boost economic growth, private sector credit should be increased to productive sector.”
Talks about rapid credit expansion raise eyebrows in the west, where overflow of bank loans led countries to reel under financial and economic crises. In Spain, for instance, credit-to-GDP ratio jumped from 118 per cent in 1990 to 369 per cent in 2011 which induced troubles. In Greece, ratio rose from 33 per cent to 115 per cent between 1990 and 2011, which triggered an economic crisis.
However, the situation is totally different here, where credit-to-GDP ratio stood at 45 per cent in 2013, 41.2 per cent in 2012 and 40.3 per cent in 2011.
Earlier, in an interview with THT, Governor Yubaraj Khatiwada had said that the country has a lot of room to expand credit and the ratio could even be raised to 100 per cent of the GDP, if such loans are extended to the productive sector.
Central bank has asked commercial banks to divert 20 per cent of total credit towards productive sector by mid-July, 2015. But, banks have been able to channel only around 12 per cent of such loans to the sector.
source:RUPAK D SHARMA, The Himalayan Times,29 July 2014
LINK
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