Deputy Prime Minister and Finance Minister Krishna Bahadur Mahara has expressed concern over the acute liquidity shortage being faced by banks and financial institutions (BFIs). 

On Thursday, he summoned Finance Secretary Shanta Raj Subedi, Revenue Secretary Rajan Khanal and Nepal Rastra Bank (NRB) Governor Chiranjibi Nepal and asked them about the current state of the financial sector and actions taken by the government and NRB to address the situation. 

During the meeting, Governor Nepal told Mahara that the liquidity situation was in a manageable position and that it would get better within a week. “Currently, we have loanable funds totalling Rs20 billion in the banking system,” Khanal quoted the central bank governor as saying. “There has been a marked improvement in the liquidity position compared to a week ago.” 

Mahara also asked the governor about media reports that most commercial banks had been breaching the regulatory threshold of the credit to core capital-cum-deposit (CCD) ratio. 

As per the regulatory provision set by NRB, banks can lend only up to 80 percent of their total funds (deposits and capital). However, it has been learnt that due to excess lending over the last six months, banks have exceeded the limit.

Governor Nepal told Mahara that he had already directed banks to maintain the mandated amount of liquidity. 

“We have directed banks to maintain the CCD ratio of 80 percent or be ready to face action from the central bank,” Khanal quoted Nepal as saying. “We have asked banks to keep their lending growth in step with deposit growth.” 

According to the Nepal Bankers’ Association, the stock of local currency deposits with the 28 commercial banks in operation totalled Rs1,775 billion as of January 27.

Their lending on the same date amounted to Rs1,611 billion. 

The shortage is the result of an uptick in credit demand in the aftermath of the Indian trade embargo. However, the rise in demand for loans has not been matched by deposit growth because of a deceleration in remittance flows.

Bankers are divided over how NRB should solve the present crisis. A few want the central bank to mount some sort of rescue action while others believe that the liquidity crunch is a temporary phenomenon and will ease in a couple of months. 

“As the lending rate has gone up, credit demand will decrease,” said a CEO of a commercial bank.

“Similarly, the money supply in the banking industry will also increase due to government spending.”