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Liquidity crunch leads Nepali banks to suspend further lending

KATHMANDU: Nepal’s banks are facing difficulty in extending more loans to the enterprises seeking credits as the Nepali banking system is facing liquidity crunch in recent weeks, officials of Nepali commercial banks said.

Due to excessive lending compared to deposit collection during the early months of the current fiscal year 2018-19 that began in mid-July, the banking system is currently facing the liquidity crunch, according to bankers. This has prevented many banks from making further lending as per demands for the credits.

“There is a lot of demand for loans due to boost in business confidence as Nepal has a stable government after the three-tier elections in 2017,” Sunil K.C., chief executive officer of NMB Bank told Xinhua on Monday. “But, we are facing difficulty to lend to the enterprises as per their demands due to lack of adequate fund.”

This has forced his bank to delay providing loans to a number of borrowers, according to him. Such situation arose due to excessive lending in the first quarter of the current fiscal year.

Since mid-July, deposits in the commercial banks grew by 3.78 percent while lending surged by 7.7 percent, according to Nepal Bankers’ Association, the grouping of Nepal’s commercial banks. This led to the credit expansion close to the regulatory limit set by the Nepal Rastra Bank (NRB), the central bank of the Himalayan country.

According to NRB, the banks should maintain the ratio of core capital combined with credit to deposit (CCD) at 80 percent. Currently, CCD ratio stands at 78 percent leaving the gap of just two percent for further lending, according to NRB.

“It means, if a large-scale withdrawal of deposit takes place, the banks will no longer be in the position to lend further,” Ashoke Rana, chief executive officer of Himalayan Bank, a leading commercial bank of Nepal, told Xinhua on Monday.

According to him, it has been difficult for the banks to lend to the big borrowers in time. “It takes time to arrange fund for big borrowers,” he said. His bank has concentrated on providing loans to the highly prioritized areas, he added.

Nepali bankers said that the country’s economy could be affected if the banks continue to face liquidity crunch in the days to come. The Nepali government has targeted an economic growth of eight percent for the current fiscal year.

A senior NRB official told Xinhua that the liquidity crunch could affect the economy. “But, the extent of impact would depend on whether credits have been extended to the productive sector,” Nara Bahadur Thapa, executive director of NRB said.

In order to support growth, Nepal’s central bank took the strategy of making more funds to the banks to lend, allowing the banks even to borrow loans from foreign or international financial institutions.

As per the NRB directive, the banks can borrow up to 50 percent of their core capital from foreign creditors. The NMB Bank borrowed 15 million U.S. dollars from International Finance Corporation (IFC), the private sector arm of the World Bank Group, recently.

“We have also initiated the process of borrowing another 15 million U.S. dollars from a British financial institution. Once we get this fund from abroad, it will help ease liquidity in our bank,” K.C. told Xinhua.

Besides borrowing from abroad, bankers said that the liquidity situation would be eased once the Nepali government’s spending picks up in the upcoming months and then money would come to the banking system from the government’s treasury.

Usually, liquidity eases in the banking system during the final months of the fiscal year due to high government spending. , (Xinhua)

Published Date: Wednesday, November 28th, 2018 | 10:38 PM

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