Kathmandu, January 27

The private sector has said that the government should immediately adopt 'effective' measures to control the current liquidity crunch being faced by banks and financial institutions as the prolonged credit crunch in the market has started adversely affecting the industrial sector of the country.

They have said that the unavailability of loans has held back new investments in the country and many industries and businesses are facing loss due to the sudden increment in interest rates on loans. They have urged the government to intervene and take stock of the situation before it has a cascading effect on the economy.

Challenges aplenty

"The unavailability of fresh credit for businesses and increment in interest rates of existing loans will directly affect production cost of businesses. This will add to inflation, which will ultimately hit customers hard," said Pashupati Murarka, president of Federation of Nepalese Chambers of Commerce and Industry (FNCCI).

Officials of Confederation of Nepalese Industries (CNI) believe that a prolonged liquidity crisis would result in incompetency of domestic products and services following increase in production cost of industries and would ultimately promote imports.

"Incompetency of domestic products will hinder their export capability, thus widening the trade deficit gap. The government and Nepal Rastra Bank (NRB) should immediately coordinate to adopt a suitable measure to resolve this problem so that the after-effects of the liquidity crisis do not become severe," said Hari Bhakta Sharma, president of CNI.

Possible solutions

FNCCI President Murarka believes that the government should devise ways to spend the almost Rs 300 billion lying idle in the government treasury.

As a result of the government’s inability to speed up capital expenditure, deposit growth has turned sluggish as compared to credit expansion, which has resulted in liquidity crisis among financial institutions. Subsequently, banks have halted loan disbursement and are promoting deposits by giving up to 12 per cent interest on fixed deposits.

Private sector representatives have also mentioned that the current cash crunch could be addressed to some extent if the government immediately clears due payments to contractors of various government-owned projects that have been pending for long. They have also said that government could make advance deposits of allowances that it provides to the general public and civil servants under different headings in the banks.

According to CNI President Sharma, the major solution is to increase government’s capital expenditure, which at present stands at a mere 14.52 per cent of the total allocated fund worth Rs 311.95 billion. This initiative, he believes would increase the cash flow in the market.

"The government also has to increase the credit to core capital cum deposit (CCD) ratio to 85 from 80, which the financial institutions have been currently maintaining. Flexible CCD ratio will offer some respite to the financial institutions facing severe cash crunch," he opined.

CCD debate

The central bank, however, has already turned down the private sector’s request to relax CCD ratio citing that it would impact other aspects of the country's economic structure.

"The current liquidity crisis is the result of unhealthy competition among banks to disburse loans. Financial institutions increased their lending to unproductive sector without keeping CCD limit in mind and now they are on the verge of exceeding the limit," Chintamani Siwakoti, deputy governor of NRB, told The Himalayan Times.

A team of International Monetary Fund had also recently warned against revising the CCD ratio saying that such a move would invite other adverse effects.

Admitting that some commercial banks had engaged in unfair competition in the past, Gyanendra Dhungana, chief executive officer of NB Bank, said, "But we have agreed not to engage in such practices while lending in the future."

Refinancing option

One of the options being floated in recent days is of the refinancing facility.

Transferring some amount of the government fund that is with NRB to different commercial banks could be one measure that the government can initiate to tackle the ongoing liquidity crunch, according to Murarka. He believes that this will increase lending capacity of financial institutions resulting in the flow of money in the market.

In this regard, Nepal Bankers' Association (NBA), on Thursday, had sought Rs 100 billion refinancing facility from NRB till the end of this fiscal year.

Bankers say they are not in a position to lend to industries and bigger projects at present, but claim they continue to provide normal loans to customers.

"The immediate solution to address the liquidity crunch is availability of refinancing to banks," said Dhungana.

What now?

According to NRB's Deputy Governor Siwakoti, liquidity situation is not as acute as has been made to believe and financial institutions themselves could resolve the issue if they were willing to increase the interest rate on regular deposit products, which stands at only two to three per cent at present.

He also believes that the liquidity crisis will not prolong if the government increases its spending capacity and releases the second instalment of its housing grant to earthquake victims, which is to the tune of Rs 68 billion.

Yesterday, the National Reconstruction Authority had urged Ministry of Federal Affairs and Local Development (MoFALD) to release nearly Rs 20 billion to Central Level Project Implementation Unit for distribution of second instalment of the housing grant. However, the fund can be released to the banks only after the District Development Committee forwards the approved files to the District Treasury Controller Office.

According to Siwakoti, NRB too is doing its best to address the current cash crunch. "We introduced repo worth almost Rs 18 billion on Thursday and this would help ease the liquidity crisis to some extent."