Manang Trade Link, the developer of the 20MW Lower Modi Hydropower Project in the Parbat district of western Nepal, is experiencing difficulty in securing regular loans installments as Nepal’s banking system has been facing issues of liquidity over the past few months.

“The bank which used to release our loan installments easily in the past, now tends to find shortcomings in our documents making the process more difficult,” complained Pashupati Murarka, chairman of the company.

Murarka, who is also the president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), the apex private sector business body of Nepal, told Xinhua that the bank has also hiked its interest rate by 2 percentage points over the last three to four months.

He is now concerned about whether the project could be completed in time if the bank continues to “create trouble” including not to provide the promised loans, as the contractor has already been issuing bills for the work it has already completed.

As businesses are facing the consequences of a liquidity crunch within the banking system, the Confederation of Nepalese Industries (CNI), a consortium of large Nepalese industries, drew the attention of Nepalese Deputy Prime Minister and Finance Minister Krishna Bahadur Mahara on Thursday about the problem and urged to take concrete steps to solve it.

According to the CNI, the banks are not sanctioning new loans and the interest rates of the old loans have risen contributing to an increase in the cost of production. Furthermore, the projects’ construction works have stalled due to a lack of credit lines from banks.

Such a liquidity crunch with the banks can also be gauged from the fact that three quarters of the commercial banks in Nepal were in no position to lend a penny last week, according to Nepal Rastra Bank (NRB), the central bank of the Himalayan country.

As per the NRB’s directive, a bank cannot provide credit of more than 80 percent of core capital and the deposit combined. “But, 21 out of 28 commercial banks crossed that limit last week, according to our observations,” said Chintamani Shiwakoti, deputy governor at the NRB.

Both the central bank and commercial bankers admit that two factors are responsible for the current liquidity crunch in the banking sector. The first is excessive lending by the banks over the last six months compared to deposit collection and the second is the Nepalese government’s failure to spend its resources, which has prevented its available funds from reaching to the banks.

According to the Nepal Bankers’ Association (NBA), the grouping of commercial banks in Nepal, the banks have lent 2.07 billion U.S. dollars up until January 27 and since the start of the current fiscal year in mid-July. But, when it comes to deposit collection, they collected only 1.2 billion U.S. dollars creating a huge deficit between deposit collection and credit expansion.

The banks had increased lending massively during the first half of the current fiscal year as many industrial and infrastructural projects moved ahead this year, after the economic turmoil of last year triggered by the deadly earthquake in April 2015 and the subsequent India blockade on Nepal.

On the other hand, the government’s treasury is holding funds to the tune of 1.88 billion U.S. dollars which is one fifth of Nepal’s total budget for the current fiscal year, as government spending has remained poor, according to the central bank. The government’s account remains parked at the central bank.

There has been no exception to the trend over the last several years that has seen more than two-third’s of the government’s spending taking place in the last four months of the fiscal year beginning from mid-March.

“We hope that the government’s spending picks up after a month, which will help add liquidity to the banking system and end the credit problem,” said Anil Shah, president of NBA.

As a result of a lack of credit, Nepalese banks have been introducing deposit schemes offering interest rates as high as 12 percent in short-term fixed deposits, with a maturity period of 100 or a few more days. “Some banks are accepting fixed-deposits with interest rates at more than 13 percent,” said Shah, who is also a chief executive officer of a mega bank.

Upendra Poudyal, chief executive officer NMB Bank, told Xinhua that their focus has been to continue to ensure loans are made available to the bank’s existing clients, even if new clients are left to wait before credit lines are extended.

With the banks not having enough funds to lend, the Nepalese central bank pumped 25.6 million U.S. dollars in cash into commercial banks over the last three weeks by outright purchase of government bonds from the banks to address the liquidity crunch.

“We have also been asking the banks to hike their interest rates on deposits in savings accounts to attract deposits from regular citizens,” said Deputy Governor Shiwakoti. Enditem

Source: Xinhua/NewsGhana.com.gh

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