Nepal | April 26, 2019

Banks in liquidity crunch ‘trap’

Himalayan News Service
Nepal Rastra Bank

Nepal Rastra Bank. Photo: THT/ File

Kathmandu, January 24

The rapid credit expansion as compared to the sluggish deposit collection has pushed the commercial banks into a ‘trap’ of liquidity crisis or shortage of funds that they can extend as loan to the borrowers.

Banks expanded credit in a rapid manner along with normalisation of economic activities following the trade disruptions of last fiscal 2015-16, as they were under pressure to maintain the same level of high profitability even after the increment of paid-up capital as per the requirement of Nepal Rastra Bank (NRB), the central bank.

“Increase in paid-up capital of banks and financial institutions (BFIs) means their capacity of lending is improved,” explained Anil Keshary Shah, president of Nepal Bankers’ Association (NBA) — the umbrella body of class ‘A’ financial institutions in the country.

The lending level of the banks cannot remain the same when their paid-up capital requirement was Rs two billion and when it is raised to Rs eight billion, according to Shah.

“It is obvious that the banks and financial institutions need to increase the lending to maintain the profitability of previous years as the capital of the banks and financial institutions will increase by four folds by the end of this fiscal, in line with the requirement of NRB,” he added.

But the rapid credit expansion of the banks and financial institutions has created pressure for them to collect more deposits.

However, at the same time, the deposit collection has been sluggish due to slow capital expenditure of the government, slowdown in remittances inflow and lack of investment opportunities in other areas, including the secondary market.

The monetary policy of 2016-17 has envisaged that credit expansion to the private sector will grow by 20 per cent to achieve the growth target of 6.5 per cent.

The credit growth of commercial banks in the first quarter of this fiscal 2016-17 (between mid-July and mid-October), on the other hand, was 5.56 per cent to Rs 1,824 billion, while the deposit growth in the same period was 4.08 per cent to Rs 1,463 billion.

In the subsequent quarter (between the period of mid-October and mid-January), the deposit growth hovered around 4.54 per cent to Rs 1,907 billion, whereas the credit growth had surged by 8.69 per cent to Rs 1,590 billion.

An analysis of deposit and lending of commercial banks in the first half (between the period of mid-July and mid-January) of this fiscal reveals nearly 15 per cent credit growth against deposit growth of 8.8 per cent.

BFIs started facing liquidity crisis from the second quarter (which started in mid-October) of this fiscal and increased the interest rate on deposits to attract more deposits so that they could expand credit.

The lucrative interest rate on fixed deposit schemes has helped attract depositors to a large extent, but the credit expansion spree of BFIs has pushed them towards tight liquidity ‘trap’.


A version of this article appears in print on January 25, 2017 of The Himalayan Times.


Follow The Himalayan Times on Twitter and Facebook

Recommended Stories: