EDITORIAL: Boost loanable funds

Given the liquidity crunch, it would be sagacious on the part of the BFIs to lend their money to the productive sectors

This is the third fiscal year in a row that the country’s banks and financial institutions (BFIs) have been facing a liquidity crunch, and this has had telling effect on all sectors of the economy, including the stock market. As a result, the Nepal Stock Exchange (Nepse) index has been showing a bearish trend without any let up. While it is true that the BFIs have not been able to release sufficient funds to those wanting to invest in the stock market, investors are also wary about buying stocks in the secondary market as they are not sure if the country’s economy is headed in the right direction. Reports by the government and independent economists and academicians are often conflicting, putting the investor in confusion. Apart from the liquidity crunch experienced by the BFI’s, recent rumours that share investors would require the Personal Account Number (PAN) to carry out transaction in the stock market seem to have also dampened their enthusiasm.

There are a number of factors why the banks and financial institutions are facing a shortage of loanable funds. First, the amount of deposits the banks collect is unable to meet the demand for loans. Second, the government’s capital expenditure is very poor. Although the country’s federal budget was unveiled at May end, much earlier than in previous times, this has not helped the government improve on its capital spending. Third, the country’s remittance inflow in the first five months of the current fiscal year has seen a marked increase - by almost 32 per cent – compared to the same period the previous year. However, nearly all of the money coming from outside has gone back outside to finance Nepal’s ever burgeoning imports. Lastly, foreign direct investment (FDI) in the country has slumped this year. Last year, FDI had been more encouraging, but this could have been because of the huge Chinese investment seen in Nepal’s biggest cement plant.

It is apparent that the shortage of loanable funds being faced by the BFIs is largely because credit growth has surpassed deposit growth. The problem will continue to persist as long as there is a mismatch in the assets and liabilities of the BFIs. The BFIs have been striving to secure customers’ money by luring them with high interest rates. However, this pushes up the lending rate and has visible impacts on all sectors of the economy, including on the stock market. Expensive lending makes returns from the stock market less attractive, leading to its downward trend. Given the liquidity crunch, it would be sagacious on the part of the BFIs to lend their money to the more productive sectors, such as industry, agriculture and services that help reduce imports and expand exports, although returns on trade financing are higher than on the productive sector. Nepal spends close to a hundred billion rupees on the import of agro products alone, although they can be produced here in the country itself. Thus, channeling funds into the productive sector could greatly reduce imports even within a few years. But sooner or later, unless the government improves on its capital expenditure, it is unlikely that the banks will see a flow of more money. The government is currently sitting on hundreds of billions of rupees for lack of spending capacity and poor planning.

Illegal river mining

In what is a welcome move, the authorities in Dhading, to the west of Kathmandu, have introduced severe measures to stop the illegal mining of river products. The District Administration Office is to slap prison sentences of up 10 years and a fine of Rs 1 million in a bid to control the indiscriminate mining of river products. A committee under the District Administration has given the rural municipalities authority to take action should anyone be found defying the local level directive.

This is not the first time that the authorities have tried to deter illegal river mining through strict punishment. But instead of seeing them regulated, the crusher industries are actually flourishing across the country, without so much as a thought to the dangers their activities pose to human settlements and to the course the river eventually takes. With large-scale housing and other construction projects going up everywhere, there will be more and more demand for river products. Unless the authorities are serious about enforcing the government rules and regulations in both word and spirit, the number of crusher industries violating the norms will only go up.