The prevailing liquidity crunch will continue unless the govt increases its spending capacity
Twenty-seven commercial banks operating in the country were facing an acute shortage of deposits well before the local level elections, forcing them to tighten credit disbursement even in the productive sectors. However, with the conclusion of the May 13 local level elections, the commercial banks have seen a sudden growth in deposit within three weeks between May 14 and June 3. It looks as if the money circulated during the election campaigns has been deposited in the banks, giving some respite to the banks, which could not issue new loans or disburse the loans as promised earlier. Many development projects, including hydropower projects, had reported that they could not receive the promised installments of the loans that they were supposed to receive from the banks. As per the latest data provided by the Nepal Bankers' Association (NBA) – an umbrella organisation of 27 commercial banks – total deposits of these banks witnessed a gradual recovery, increasing by Rs 20 billion within 20 days to reach Rs 4.390 trillion after plunging sharply in the earlier month. The statistics clearly indicate that the money was stacked by politicians and other business groups targeting the local level elections. However, the weekon-week deposit has slowed down from Rs 6.85 billion on May 20 to Rs 5.29 billion in the weekend ending June 3.
The NBA data reveal that the total deposit of the commercial banks had reached Rs 4.370 trillion durached Rs 4.370 trillion during the 10th month of the current fiscal. However, no significant deposit growth has been seen even after the elections.
The country's financial market is currently under tremendous pressure to manage liquidity, mainly because of Nepal Rastra Bank's (NRB) rule of credit-deposit (CD) ratio. In its monetary policy, unveiled shortly after the country faced a crisis on foreign exchange reserve, NRB had replaced the provision of credit to core-capital plus deposit (CCD) ratio with a maximum limit of 85 per cent by CD ratio with a ceiling at 90 per cent. This target has to be achieved by the end of this fiscal.
The main reasons behind the liquidity crunch in the banking system are the low government spending in the development sector, excessive disbursement of loans by the banks in unproductive sectors and slackness in remittance inflows. In the recent months, tourism has seen satisfactory growth, but its actual impact on the national economy has yet to be seen. Finance Minister Janardan Sharma has blamed the banks themselves for failing to collect the loans they had disbursed in the unproductive sectors. With just one month left to end the current fiscal, the government's capital expenditure has been the lowest compared to the previous years. Had the government spent its funds in the development projects in time, the banks and market would not have faced the liquidity crunch. Most of the contractors who had won government and private contracts have not been able to pay their workers as the banks have failed to provide loan installments to them. The measures taken by the NRB has also not yielded any positive results in increasing deposits. The prevailing liquidity crunch will continue to remain unresolved unless the government increases its spending capacity. At the same time, the commercial banks should also stop lending in the unproductive sectors.
Flight diversion
That two international flights on Wednesday were diverted to India due to bad weather in Kathmandu instead of landing at the new international airport at Bhairahawa has surprised many. Unable to land at Tribhuvan International Airport due to adverse weather conditions, Vistara Air's flight from New Delhi was diverted to Lucknow while that of Indigo Air returned to New Delhi. Logically, the Gautam Buddha International Airport (GBIA) at Bhairahawa would have been the ideal place to land because of its close proximity to Kathmandu instead of flying to Indian airports over long distances.
Could the flights originating from New Delhi have been diverted to India because the two airlines were unsure if the GBIA had the hospitality facilities to cater to international passengers? The GBIA has been taking in international flights from the Gulf countries, and there has been no problem with them.
Since flight diversions due to traffic congestion or bad weather at airports are normal, international airlines must be told that Nepal now has a second international airport capable of landing big aircraft. And if any facilities are absent, then the concerned authorities should attend to them immediately.
A version of this article appears in the print on June 10, 2022, of The Himalayan Times.
