September 23: Banks have reduced the credit flow due to liquidity crisis. Since the beginning of the current fiscal year, the banking sector has been experiencing a liquidity crunch. Lately, this problem has intensified due to various reasons. 

Anil Keshari Shah, Chief Executive Officer (CEO) of Nabil Bank, said banks are reducing the credit flow to manage liquidity. “Credit that has been extended is also being provided at a higher interest rate,” said Shah.

Shah said that it could impact on the overall economic growth rate. "Increase in credit flow is the driving force of economic growth. However, due to lack of liquidity, we are reducing the credit expansion. In this case, the economic growth rate may also be affected which we should be prepared for." 

Liquidity crunch is caused due to multiple factors. Banks are also said to be one of the factors responsible for creating liquidity crunch. Excessive credit flow in the last fiscal year has affected the state of liquidity this year. Nepal Rastra Bank scrapped the CCD ratio and implemented CD ratio which has also affected liquidity. While implementing this provision, the average CD ratio was around ninety one percent. Shortage of liquidity occurred while maintaining CD ratio at the specified limit. 

However, the major reason behind the liquidity crunch is the government's inability to spend the budget. "Government spending is not the key to liquidity management. But, we are looking for the day when the government starts to spend. We are exploring other options as well,” said Shah. 

The government has not been able to spend the budget due to the replacement bill introduced by the government. Budget spending is the main source of banking liquidity. Liquidity crunch has arised as the budget has not been spent for the last two months of the current fiscal year.

Banks have increased interest rates on deposits to 10 percent to address the liquidity problem.  Nepal Rastra Bank has also been managing liquidity for the banks using financial market instruments. NRB has provided Rs 100 billion through the repo system. It is releasing additional Rs 30 billion in the market. Yet, it is still challenging to address the liquidity problem, according to bankers.

 "It will be resolved in due course of time but is certain to create some fluctuations in the interest rate," said Shah.

Anraj Bhattarai, an expert on banking, said the liquidity problem is short-lived. "The current liquidity crunch will not last for a long time.

NRB can easily address this issue by making some policy changes. However, banks have reacted unnecessarily by increasing interest rates. “This issue might be addressed through the first quarterly review of monetary policy," added Bhattarai.

He said the CD ratio should be further clarified through the first quarterly review of monetary policy. “At present, Rs 152 billion credit has been extended in foreign currency. If such loans are not counted in the CD ratio, liquidity of Rs 152 billion would be available."

The central bank should also introduce a flexible policy applicable for banks to invest in the stock market. "Banks are not allowed to sell their shares for one year. As a result, Rs 70-80 billion invested by banks in the stock market can't be used for the time being which should be addressed by the central bank," he said .