Liquidity is ability of banks and financial institutions(BFIs) to meet the demand for cash from depositors or borrower holding cash. If the BFIs does not meet the demand for cash from customers, the economy is considered as liquidity crisis.
The current liquidity crisis has arisen as a result of increased credit disbursements. This promotes economic activity and recovery in the country. Despite raising deposit interest rates, banking and financial institutions (BFIs) is battling a major liquidity shortage in recent months. 27 commercial banks are now offering 11.03 percent interest on fixed deposits, in accordance with the Nepal Rastra Bank’s direction. Prior to February 1, they were offering 10.05 percent interest.
Savings account interest rates have also increased to 6.03 percent. Despite the interest rate modifications, deposit collection in BFIs has not increased as much as expected. According to the Nepal Bankers’ Association (NBA), total deposits of 27 commercial banks reached 43.24 kharba. Similarly, throughout this time, BFIs have floated loans and advances totaling 41.42 kharba.
According to bankers massive imports of goods, combined with a reduction in remittance inflows in recent months are the main causes of the liquidity shortage. Following the removal of the COVID-19 limits, imports of vital products in the construction sector have increased dramatically. Due to the liquidity crisis, the BFIs has only distribute loans of Rs 10 billion. It is insignificant when divided among the 27 banks. The central bank has mostly concentrated on regulating domestic demand in order to stabilize external forces.
However, identifying one possible reason may not be enough to investigate the scope of the current problem. There’s a sliver of evidence that implies the rate of remittance inflow has slowed in recent years. Individuals’ disposal income as well as a country’s GDP are both boosted by remittances. The sharp drop in remittance inflow has raised fears that any further decline could lead to macroeconomic structural imbalance.
Due to the absence of credit flow as most firms had shut down during the pandemic and shortly after. Banks had extra liquidity in their hands during the pandemic and shortly after. As a result, BFIs have actively expanded their lending boundaries to unproductive areas at lower interest rates. BFIs continued to push out their aggressive expansionary lending plan with each passing month of this fiscal year.
An rise in imports and a drop in remittance inflow in the country are to blame for the government’s shrinking foreign reserves. When compared to the same period the previous fiscal year, total imports increased by NPR is 247.8 billion. And total exports has increased by NPR 41.9 billion in the first four months of the current fiscal year.
Fuel imports surged by 118.6 percent in the first four months of the current fiscal year. This has increased the cost of petrol.
The NRB’s monetary policy is successful in addressing liquidity difficulties under normal circumstances. Bank mergers, lowering the CRR, lowering the inter bank lending rate, and liquidity injection are some of the options that the NRB has been exploring.
The government should acquire the banks, with control and proper auditing to identify which ones are excellent solution for liquidity crisis. It is necessary to address the core cause of Nepal’s financial crisis. It is an excessive reliance on imports and remittances. To avoid another liquidity crunch in the market, stable macroeconomic policies are required. The promotion of private sector growth in export-oriented businesses is important in an economy.
