May 5: The credit flow of banks have contracted due to the liquidity crisis in the banking system as well as the policy intervention adopted by Nepal Rastra Bank (NRB). As a result, the banks are unlikely to meet the target of credit flow fixed by the central bank.

NRB had set a target for banks and financial institutions to expand credit flow by 19 percent in the monetary policy for the current fiscal year. As per the target, BFIs have to make loan investment of around Rs 800 billion. However, the credit flow of BFIs in the first nine months of the current fiscal year stands at 12 percent.

“Banks are unable to expand credit flow due to liquidity crisis,” said Sunil KC, vice president of Nepal Bankers’ Association, adding, “Even 15 percent credit expansion seems difficult this year.”

Nepal Rastra Bank’s Governor Maha Prasad Adhikari also admitted during a public function organized on Wednesday that the BFIs will not meet the credit expansion target this year.

BFIs were aggressively involved in credit expansion last year after the impact of Covid-19 subsided.

The central bank had set a target of 20 percent credit expansion in the fiscal year 2020/21. However, credit expansion of BFIs during the review period stood at 28 percent.  Despite expanding credit flow, banks failed to collect deposit in the same proportion.

Therefore, banks are unable to extend new credit right now.

NRB had also fixed 90 percent CCD ratio in the current fiscal year from the earlier CCD ratio of 85 percent. Due to this provision, banks credit flow was affected as they can extend credit flow in proportion to deposit collection.

Economist Dr Bishwas Gauchan says banks were aggressively involved in credit flow to the unproductive sector.

“There is over financing in our economy. Credit flow has not helped in economic growth. It has only helped increase imports which is unproductive,” said Gauchan.

Central bank officials have also concluded that banks have mostly extended credit to the unproductive sector due to which there has been liquidity crisis.