Bankers have stressed confidence building measures (CBMs) by   stakeholders and the government to encourage deposits back into the banking system.

During the last seven months, deposit growth has remained at just 3.9 percent against currency circulation of 10.9 percent, pointing towards how the liquidity crunch is affecting the banking system.

Speaking at the roundtable discussion on the challenges and solutions facing the banking sector, organised by the Kantipur Publications on Thursday, bankers said the government had a bigger role to play to bring the banking system back on track.

“Over the last few months, banks are increasing interest rates on deposits and have been making upward revision of them,” said Sashin Joshi, president of Nepal Bankers’ Association. “But, the growth of deposits has remained sluggish.”

Merely increasing interest rates on deposits, he said, was not the solution for the liquidity crunch. According to Joshi, provisions requiring disclosure of source of income for deposits up to Rs. 1 million, capital gain tax on real estate and larger portion of liquidity remaining outside the banking system are major factors behind the current crisis which need to be addressed.

“People involved in real estate business are not coming through the banking channel after the capital gain tax was imposed,” he said. “The government has also failed to collect enough tax from it.”

Joshi said that collectively commercial banks were in position to lend just Rs. 20 billion. “It is difficult to lend even this amount if liquidity is not injected,” he said.

Banks have stopped new lending almost completely. If the situation is not addressed immediately, the bankers said, the liquidity crunch may turn into a credit crisis that could affect the whole economy.

Claiming that the banking sector was the most transparent, they said that complaints regarding higher interest spread rate were baseless while mentioning cost involved in banking transactions.

During the interaction, chairman and managing director of Kantipur Publications Kailash Sirohiya said that the current liquidity crisis was turning into financial crisis which needs to be addressed immediately.

courtesy: the kathmandu post (Apr 16,2010)