Liquidity crunch in Nepal

Liquidity Crunch or Liquidity Crisis or Credit Crisis is the situation where the demand for the cash is high than the supply resulting to high rate of interest on deposits as well as lending part. Though there is no any bank run case in Nepal, banking industry has become the victim of liquidity crunch. The bank rate on deposits has reached the ceiling of 12%, could have crossed that limit also if not intervened by Nepal Rastra Bank (NRB).What are the factors behind the debilitation of Nepalese economy?, let’s have clear look on it.

Freeze of Government Funds

The total allocated capital expenditure of the country is 311.95 billion out of which capital expenditure stood at 17.66 billion, only 5.66% of the total budget. The government exchequer holds the remaining funds, which is the only factor that could conciliate this crunch. As a consequence, the industries and businesses are finding it difficult to get the loan facilities and if provided then at higher rate of interest. These days the banks crack up meager amount of credit to those clients who have sound relationship with banks and there are many instances where industrialists and businesses have returned without any credit facilities. So, the government spending has a major role in maintaining the cash cycle in the economy through the mobilization of funds in developmental works.

Share Offerings

The offering of share in the primary and secondary market is also responsible for liquidity crunch. According to the data provided by Securities Board of Nepal (SEBON) (FY 2015/16) 9 hydro power campanies,5 developmental banks, one finance company, one insurance company and one commercial bank has gone for public share issue, some with premium pricing. This offering of shares all holds the cash for minimum of one and half month based on the share allotment policy of the offering organization.

Whilst Securities Board of Nepal has demolished a rule that the money collected in the initial public offering (IPO) or follow-up public offering (FPO) to be stationed at the Nepal Rastra Bank (NRB) for a certain period of time. This decision was reversed to counter the cash shortage in the market. The decision comes in the wake of liquidity shortage in the banking system which has crippled the capacity of the BFIs to float loans to borrowers.

Remittance

Nepal, widely known as the country which highly depends on remittance contributes 25% to GDP.According to the report of Department of Foreign Employment (DoFE), the number of Nepalese leaving for foreign employment decreased by 18.4 percent during the year 2016.The main reason for decrease in the outflow of migrant workers is to stay back at home to rebuild and a slowdown in the labor-receiving countries. This has also wide impact on the economy because the reduction in remittance inflow also contracts the source of national income and hit the liquidity position.