In Fiat Interest and Inflation cancel each other and promote borrowing and thats a healthy thing, but bitcoin economy a borrower has to fight against deflation and interest, if interest rate gets lower to zero then lenders will have no incentive in lending
At a basic level, the person providing the loan hopes to receive a small return (interest) for providing the capital, and the person receiving the loan hopes to use that capital to make profits in the short term.
Removing inflation from the equation (eg by providing a BTC loan) does raise the bar for what could be considered a profitable venture for the loan taker, but that does not mean every loan will no longer be profitable. Rather, it just incentivizes individuals to seek out ventures which have a higher chance of turning more profit.
In my opinion, the argument of "nobody will spend a deflationary currency on anything!" is silly. Individuals will still have to spend, they may just have a higher threshold for the question of "what is worth buying? (or investing in?)". Even if your money is deflationary, you'll still have to pay rent, because its better to have a safe place to live than to have a little more money in the future, but nowhere to sleep.
Further if somehow we make it work, where will the Interest amount come from ?There will be more btc to be repaid then actual btc we have
Interest on a loan will come from profits made by utilizing the loan. This is no different than a loan denominated in dollars: when you pay the loan back, the interest you pay is not 'freshly minted money', it is just money that already existed in the system, but you are now the owner of.
In general: Use-cases for bitcoin are not dependant on how well the system mimics the lending properties of the traditional banking system, in fact bitcoin is likely useful because it has different properties than the traditional system. Bitcoin is a decentralized, permissionless, borderless, immutable and programmable system of value. What exactly the implications of this are is a story that is still unfolding, but it certainly does promise many exciting things. I think one of the most important is that it grants the user financial sovereignty, which is a rare and important thing in our increasingly Orwellian tech world.