The central bank has followed up its directive with further requirements so that it can monitor well the direction of the credit of the BFIs

Banks and financial institutions (BFIs) have been struggling with liquidity crunch for some time, and they are reported to have nearly reached their lending limits, that is, 80 percent of the deposits they have collected. That is why the representatives of commercial banks have made a case for increasing this limit to, say, 85 percent to ease the pressure on the banks. But the Nepal Rastra Bank rejected this request the other day, urging the BFIs to increase investment in the productive sector, as most of their loans have been concentrated in the unproductive sector, such as to auto buyers and real estate purchasers. Sensing the dangers inherent in this over dependence of the BFIs on credit to the unproductive sector, the central bank has followed up its directive with further requirements so that it can monitor well the direction of the credit of the BFIs. Its latest requirement that the BFIs present their monthly details of loans to the productive sector shows the seriousness of the situation. This applies to BFIs of the classes A, B, and C.

According to NRB figures, the loan growth in the unproductive sector has been double the loan growth in the productive sector at a time when BFIs have already mostly invested in the unproductive sector. In such unproductive sectors the BFIs do not have to do laborious work and work out viable imaginative schemes for investment. The rates of return on the investment of the Nepalese BFIs are nonetheless among the most attractive in the world, but how far they have contributed to the economic progress of the country except increasing consumption and imports is an issue which the central regulatory authority cannot ignore. Indeed, NRB is waking up to the dangers of too much banking investment in the unproductive sector. Though belated, as this problem is not a recent one, this move of the central bank is welcome and should be followed up more rigorously, punishing the offenders in the process.

The decline in banking liquidity has been due to several factors, mainly the decline in the remittances of the Nepali migrant workers abroad and the government’s low capacity to spend its capital budget. Rapidly rising import bills vis-à-vis exports have also helped to make the liquidity situation of the country worse. NRB’s focus on increasing loan flow into the productive sector aims to create more jobs, boost production, decrease imports, and so on. Depending on their classes, the BFIs are required to channel certain percentages of their credit into the productive sector, the Class A institutions 20 percent, Class B 15 percent, and Class C 10 percent respectively. Moreover, Class A institutions have to channel 15 percent of their credit into agriculture and energy. As the loan expansion to the productive sector has already been very low in the first half of the current fiscal year, it is highly unlikely that the BFIs will be able to meet the targets set by the central bank during the second half of the year. What is the most important thing in the end is whether the targets of the productive sector investment have been met. The central bank needs to be stricter in this respect than it has been so far.

Delayed action

The National Reconstruction Authority (NRA) has identified as many as 19,866 households as eligible for retrofitting grant in 14 worst hit districts by the 2015 earthquake. Each of the beneficiaries will be entitled to Rs. 100,000 in two tranches which will be disbursed through banking channels once the PM-headed Steering Committee gives its approval for the plan. Every beneficiary is required to reach an agreement with the VDC or municipality officials to obtain the retrofitting grants just like the others who obtained them for rebuilding the damaged homes.

The beneficiaries are required to retrofit their houses as per the instructions given by engineers designated by the NRA. It has been almost two years since the devastating quake flattened the hilly districts in the central region. Most of the families whose houses were partially damaged have already repaired their houses even without the financial or technical assistance from the NRA. A question that remains to be answered is whether those families will also get the retrofitting grants as announced by the NRA. This rule must apply to all. The snail’s pace of distributing grant assistance has led many quake victims in the lurch. Technical assistance should have been provided to the victims immediately after the disaster.