High interest rates make life difficult for businesses

Anish Bir Singh Kansakar, owner of Sagun Export Nepal which produces and exports felt products, pashmina shawls and handmade knitwear, has seen his business plunge during the Covid lockdowns.

It’s been a year since Kansakar started making a semblance of recovery, and then something else came along that wiped the smile off his face. High interest rates dealt another blow to his faltering business.

“Any increase in interest on loans lowers the profit margin and hurts the overall business,” said Kansakar, which exports most of its products to Australia.

“The cost of production has gone up. If the interest rate doesn’t go down, businesses will struggle. I’m going to have to lay off staff and reduce raw material orders,” he said.

“We quote a certain price to our international customers, and we cannot change it every time the interest rate changes,” Kansakar said.

The banks have raised the interest rate three times in the past year. Bankers say rising interest rates are a global phenomenon.

According to Umesh Prasad Singh, President of the Nepal Federation of Cottage and Small Scale Industries, many small and medium enterprises have been pushed to the brink by rising interest rates just as they are emerging from the pandemic.

“About 80% of small factories operate with bank loans; and with rising interest rates, they are not able to pay them back,” Singh said.

“Only 30% of them are operating due to lack of funding and high interest rates, and they will gradually close too. While it is already difficult to obtain loans from banks, the sharp increase in interest is not not normal,” Singh said.

“We started a protest against the high interest rates in Rupandehi by refusing to pay interest and take new loans, and it will soon go all over the country. The interest rate should go down to single digits. We will not accept the new interest rate at any cost,” he said.

“The Ministry of Finance and Nepal Rastra Bank should have taken matters into their own hands instead of giving carte blanche to private banks to decide the interest rate. significantly 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 strengthening dollar,” said Anil Kumar Upadhyay, chairman of the Bankers Association of the United States. Nepal, to the Post in a recent interview.

“The liquidity crisis is another reason to increase the cost of the system of banks maintaining it by borrowing from the central bank, and the price has to be transferred somewhere.”

Singh says it’s wrong to raise the interest rate so sharply when Covid-hit businesses face inflation due to high fuel costs caused by the Russian-Ukrainian war.

“Even though the refinancing service has been inserted into the monetary policy, small entrepreneurs should still benefit from the program. An increase in the interest rate disrupts the entire cycle of production, from raw materials to sales,” Singh said. .

Economist Raghubir Bista said a rise in interest rates obviously means high operating costs, creating a difficult survival situation for micro-factories, artisanal factories and small factories.

“The government is totally occupied with the upcoming elections, and the economy is not on the agenda at the moment. It will take a long time before a new government is formed and 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 an effort to reduce demand for credit.

A World Bank report said that in a liberalized market, faced with a shortage of loanable funds, banks should raise interest rates on deposits offered to the public to encourage them to increase their deposits.

According to the 2018 National Economic Census, there were 923,356 operating establishments in Nepal, of which about half were registered. Among them, micro, small and medium enterprises represent 69.3%, 25.2% and 5.5% respectively. They employed 2.74 million people,

Only 35.5% of micro, small and medium enterprises have access to credit.

According to a Nepal Rastra Bank report on financing small and medium enterprises in Nepal, small enterprises borrowed between 1 and 5 million rupees and medium enterprises took out loans ranging from 5 to 150 million rupees.

About Alexander Estrada

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