Current liquidity crunch/credit crunch of Nepal 2016 and its effect

on Nepalese business

prepared by Roshan pant(MBM-Nepal commerce campus)

• The rise in credit flow from BFIs despite slow deposit growth in recent months has now resulted in the liquidity shortage. Deposits have slowed in recent months due to deceleration in remittance growth as well as the failure of the government to increase development expenditure, while banks have been on a lending spree amid rising credit demands and pressure to expand business with the rise in their paid-up capital.

• Making massive investments in the non-productive sectors, including real estate, housing and hire-purchase over the last six months, Nepal’s commercial banks faced a cash crunch

• With cash flow declining, the commercial banks have doubled the interest rate on savings. Commercial banks offered up to 11 percent and development banks are offering up to 13 percent per annum of interest rates on saving accounts.

• Despite the increased interest rate, money did not came back. As the banks tighten the loan, the share market headed toward a crash, with the market likely to see further decline

• many commercial banks were literally left without any money to extend new loans, showing that the credit expansion of most of these banks will be likely to come to a grinding halt. The banks have been demanding fresh financing facility for the time being to revive their lending capacity.

prepared by Roshan pant(MBM-Nepal commerce campus)

Reasons for liquidity crunch of Nepal

• failure of the government to increase development expenditure due to which money is not pumped in banking sector

• Lending compulsion to increase the paid of capital(unnecessary lending)• Bank deposit depletion-falling remittance,filing taxes taxpayers withdrew nearly

Rs 40 billion from the banking system to file taxes• Huge Corruption money out of banking system (Money not channelized to banking

system, billions of un-accounted money in physical form• The tightening of the CCD ratio -- a rule enforced by the NRB to measure liquidity

ratio of the BFIs -- has crippled the capacity of the banks to extend lending. Banks are currently allowed to convert 80 percent of their deposits into loans. This means that for every Rs100 collected in the form of deposit, only Rs80 can be extended as credit. This, in technical terms, is referred to as credit to core capital-cum-deposit (CCD) ratio, which should stand at a maximum of 80 percent.

• Massively growing imports and declining exports in business, widening trade deficit is another important reason for the existing crisis.

prepared by Roshan pant(MBM-Nepal commerce campus)

Ways

• government should expedite capital spending,• NRB should inject money in the banking system, which banks can use as

fund for lending against the government securities they hold Nrb injected repos for the solution but was too costly for the banks the rate was 4.87%

• Banks should offer higher interest rates on saving deposits to attract more funds and retain the deposits

• Government must attract remittance through formal banking system. Informal remittance like “Hundi” must be immediately stopped.

• Public money which is outside banking system must be attracted.• NRB may provide some flexibility in increasing CCD ratio, but this step can

be risky for banks.• Deposit base at bank shall be encouraged strategically (Recent Indian

strategy to bringing money back in banking system can be very helpful here)

prepared by Roshan pant(MBM-Nepal commerce campus)

Impact on business of Nepal

• Overall credit expansion is halted hampering economic growth. the banks are not sanctioning new loans and the interest rates of the old loans have risen contributing to an increase in the cost of production.

• Business are suffering due to increased interest rates• Credit is expensive due too which sharemarket investors arehesitating to invest by taking loans• The important project are halted as loan installment are slowed by bank• Inflationary pressures are there after earthquake due to more money in hand of consumer the inflation situation

is even worse • lack of investment friendly environment, political instability, labour problem and high production cost, the

business community is badly back-ridden by the liquidity and credit crunch at present. “The enthusiasm of industrialists has been killed by the frequent increase in interest rates and there are slim chances of opening new industries

• On one hand, discouraged by the April 2015 earthquake and economic blockade, the confidence of the private sector was enhanced with the super budget of this fiscal and there was a huge influx in the demand for loans. But banks are suufering luquidity crisis

• The financial health of the country is weak at the moment as the financial intermediates are not so healthy• On the other hand, in the middle of this fiscal the government’s achievement in the revenue generation has

exceeded its targets but when it comes to expenditure – it is negligible the development expenditure are low and the investor are deprieved by loan because the money is not pumped into the economy

• Massively growing imports and declining exports in business, widening trade deficit is another important reason for the existing crisis.

• Import shall be discouraged and Export shall be encouraged, environment to promote domestic goods in international markets can contribute to overcome the crisis. FDI invitation, but this will be not possible until political stability is maintained, until politician has crystal clear vision for country development

prepared by Roshan pant(MBM-Nepal commerce campus)