Around Rs. 12 billion that went into the hands of individuals from commercial banks has not come back into the banking system over the last four months, causing stagnation in the growth of deposits.

Deposits in domestic currency with banks grew by just Rs. 4 billion from mid-December 2009 to mid-April 2010. Deposits grew to Rs. 535 billion from Rs. 531 billion during that period. However, currency in circulation (cash that went into individual hands from commercial banks) grew by Rs. 16 billion.  The total currency in circulation reached Rs. 150 billion from Rs. 134 billion during the same period, according to Nepal Rastra Bank (NRB).

“The circulated currency should have come back into the banking system,” said an official of Nepal Bankers’ Association. “This missing money shows that transactions are being made outside the system.”

Although banks have increased interest on fixed deposits over the last nine months, they have still failed to attract deposits from the people.

Bankers point out that stagnation in deposit growth cannot be solved by just increasing the interest rate. Kumari Bank chief executive officer Radhesh Pant said political instability, policies such as compulsory disclosure of income at source for deposits and other tax provisions are responsible for slow deposit growth.

Bankers are also saying the capital gain tax imposed on real estate sector also has encouraged transaction outside the banking system. 

“After we increased the interest on fixed deposits to 9.5 percent from around 7 percent, the situation has started to improve,” said Binod Atreya, chief executive officer of Nepal Bank Limited. The liquidity crisis caused by slow deposits has also hampered the bank’s ability to lend. Credit flow of banks declined by Rs. 4 billion to Rs. 466 billion in mid-April from Rs. 470 in mid-February.

According to Pant, banks are sceptical of lending to the real estate sector due to the NRB directive that requires them to reduce their exposure to 40 percent this year and wind down to 25 percent in three years. Banks have almost stopped lending for new projects. Entrepreneurs complain that banks hesitate to lend even for ongoing projects. During a recent interaction at the Kantipur Publications Roundtable, bankers warned that the country could face credit crunch failing even to lend to priority projects if the existing liquidity crisis was not solved as soon as possible.

coutesy: the kathmandu post