KATHMANDU: High lending and low deposit are behind the current liquidity crunch, said a Nepal Rastra Bank (NRB) official. Commercial banks have collected Rs 40 billion and invested Rs 75 billion in the first four months of the fiscal year 2009-10. There is a vacuum of Rs 35 billion in the financial sector and that is causing the liquidity crunch, said Maha Prasad Adhikari, acting director general . He, however, hoped that the trend would be corrected soon by the measures taken by NRB. “The central bank is strictly monitoring banks and financial institutions,” he said adding some more tools will be used to solve the problem if needed. According to Adhikari, liquidity crunch was at its peak in the first-half of January and is now in corrective mode. He voiced grave concern at the dwindling foreign exchange reserve and growing import that is resulting in negative balance of payment (BoP). Foreign exchange reserve has significantly reduced as BoP has gone negative to Rs 20.49 billion in the first four months current fiscal year. Pradeep Man Baidhya of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) revenue committee suggested the government spend in the development sector projects and take measures to reduce imports to mitigate the current crisis. “A way out for import reduction should be sought first,” he said. However, as Nepal is a signatory to the World Trade Organization (WTO) it can’t clamp direct import restrictions. “The Ministry of Finance (MoF) and NRB should rethink their policy and initiate long-term financial plans now,” he said. The last four months have proved they failed to manage the financial crisis, he added. The current liquidity crunch is a result of currency note shortage from last September. Banks and financial institutions imposed ceiling on withdrawals when NRB could not supply enough currency notes as per market demand. The currency note shortage in the festive season made people suspicious of banks’ and financial institutions’ position, said former NRB governor Dipendra Bahadur Chhetry. “Banks lost their credit when they could repay deposits in Dashain and Tihar,” he added. He described a gloomy picture of the economy saying that the real estate sector is nervous and entrepreneurs are worried about rising interest rates. “Industrial growth is not possible without handsome subsidies from now onwards,” he said, “It will take at least three years to draw up a subsidy plan.” Commercial banks lending rates have jumped to 18 per cent from 11 per cent a month earlier. Bank of Asia Nepal Ltd chief executive officer Parshu Ram Chhetry pointed out that the growing network of banks and financial institution was causing the liquidity crunch in Nepal. “Around 194 branches and over 200 ATM outlets of commercial banks were added last year,” he said, “This distribution is creating a shortage of money.” There is no risk of collaspe of real estate sector in Nepal, he said adding they it is doing well till date. “Even if the market value of real estate decreases to 50 per cent it will not affect banks,” he said. Commercial banks have Rs 86 billion investment in the real estate sector and it will be Rs 114 billion if development banks and financial companies add to it. Nepali commercial banks have a total deposit of Rs 580 billion and lending of Rs 467 billion at mid-December. The first four months of the fiscal year 2009-10 witnessed a large gap between lending (19 per cent) and deposit (7.4 per cent) in commercial banks.