Kathmandu: Bankers blame prolonged liquidity crunch for the present credit crunch in the country.

“The liquidity crunch has forced banks to delay even the already committed loans,” said a member of Nepal Bankers’ Association (NBA).Contrary to bankers’ expectation that liquidity situation would improve from April, the re still is no reason to cheer at present.

Delayed budget coupled with government inability to spend has caused the liquidity crunch in the financial sector, a banker said, adding that normally banks face tight liquidity situation for two months every year “but this fiscal year, it has prolonged to almost the entire year.”

Due to liquidity crunch, banks are not able to finance automobiles, let alone the productive and housing sectors. The latter was created as a separate portfolio to ease financing for housing developers.

Due to tight liquidity, some 300 vehicles are stranded at Birgunj customs as banks have stopped financing automobiles. “It has also hurt government coffers as automobiles are contribute in a major way to the revenue,” Automobile Dealers Association President Saurav Jyoti said, adding that automobile import has plunged by 40 per cent.

Housing and real estate have also had to bear the brunt of the tight liquidity situation. “In the last seven years, only 33 housing projects were approved,” vice president of Nepal Land and Housing Developers’ Association Om Rajbhandari said, adding that in 2009-10, not a single project was approved due to tight liquidity situation.

However, government officials and the central bank do not agree. “The banks have been lending for longer period and collecting short term deposits creating a deposit-lending mismatch that is one of the key reasons for tight liquidity,” according to senior economic adviser at the Ministry Keshav Acharya.

The government treasury had Rs 6.47 billion surplus by the ninth month of the current fiscal year, he said, adding that the amount is not that huge, but on top of that banks are buying development bonds but are not interested in repo that could have injected liquidity.

“They have bought Rs 2 billion worth repo, while the central bank had issued Rs 5 billion repo last week,” said central bank spokesperson Bhaskar Mani Gyawali. “Had there been tight liquidity situation, the banks would have bought Rs 5 billion worth repo,” he said, adding that, on the other hand, the central bank received Rs 7 billion worth application for Rs 5 billion worth development bond last week.

Though, bankers are claiming that Credit to Deposit ratio has gone up, central bank governor Yubraj Khatiwada claimed that CD ratio has not gone over the board. “All the indicators including CD ratio of commercial banks are sound,” he said, adding that there is, however, mistrust among the banks themselves.

Bankers’ belief that deposit growth rate will remain constant has led to today’s tight

liquidity situation. “They lent aggressively believing that the deposit growth rate would remain constant, which was wrong” he added.

According to central bank data, commercial banks had Rs 647 billion worth deposit by May end. By the end of last fiscal year, they had Rs 617 billion worth deposit. “The deposit growth rate has slowed down,” the governor said.

source: Chalise, Kuber(2011),"Liquidity hits credit scene", The Himalayan Times, 5 June 2011