Kathmandu, February 17

Experts have blamed the current situation of credit crunch to the inability of commercial banks and other financial institutions to compromise on their profits and lax monitoring by Nepal Rastra Bank (NRB) — the financial sector regulator.

They said that had commercial banks not looked into making high profits while lending huge amounts in different unproductive sectors, the current cash crunch situation would not have become so intense despite low capital spending of the government.

“Low capital expenditure is undoubtedly the major cExperts have blamed the current situation of credit crunch to the inability of commercial banks and other financial institutions to compromise on their profits and lax monitoring by Nepal Rastra Bank (NRB) — the financial sector regulator.ause behind the present situation. But commercial banks are equally responsible for the credit crunch as they were too profit-oriented,” said Bishwambher Pyakuryal, chairman of the Institute for Strategic and Socio-Economic Research (ISSR). According to him, NRB on the other hand was not able to properly monitor the financial market and activities of the commercial banks.

Pyakuryal, also a senior economist, opined that the NRB’s directive to banks to hike their paid-up capital through the Monetary Policy for fiscal year 2015-16 compelled commercial banks to make risky investments.

“As commercial banks have to increase their paid-up capital to Rs eight billion by this fiscal, they were pushed towards making risky investments, which resulted in

the current situation,” he stated. “As banks had limited time to meet the target, they focused on lending regardless of any sector, which ultimately led to financial instability in the market.”

According to Pyakuryal, NRB was also not alert enough to monitor the financial sector and the means that banks have adopted to meet the given target.

NRB was also not alert enough to monitor financial sector

• Bishwambher Pyakuryal, Chairman of ISSR

Informing that NRB has almost Rs 11 billion refinancing fund, he said that the central bank should provide refinancing loan and the government should immediately disburse the second instalment of the housing grant to earthquake victims in a bid to ease the current situation.

Govinda Nepal, member of ISSR, said that more than 70 per cent of total capital spending in Nepal is often made in the third trimester, thereby resulting in liquidity problem in the country. “This trend of capital spending directly puts pressure on the government to spend on less strategic and productive projects and also provides an opportunity to the government to distribute funds to politically motivated small projects.”

According to him, low capital spending of the government is the result of allocating budget without considering the readiness of projects and government’s failure to take action against low-project performance. “Making project readiness the main criteria for project approval and regular monitoring of priority projects will certainly increase capital spending, which will ultimately control liquidity problems,” Nepal opined.