Nepal recently suffered the liquidity crunch there were certain reasons behind them and possible few measure were taken to eradicate them out.

1. Current liquidity crunch/credit
crunch of Nepal 2016 and its effect
on Nepalese business
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commerce campus)

2. • The rise in credit flow from BFIs despite slow deposit growth in recent months has
now resulted in the liquidity shortage. Deposits have slowed in recent months due
to deceleration in remittance growth as well as the failure of the government to
increase development expenditure, while banks have been on a lending spree
amid rising credit demands and pressure to expand business with the rise in their
paid-up capital.
• Making massive investments in the non-productive sectors, including real estate,
housing and hire-purchase over the last six months, Nepal’s commercial banks
faced a cash crunch
• With cash flow declining, the commercial banks have doubled the interest rate on
savings. Commercial banks offered up to 11 percent and development banks are
offering up to 13 percent per annum of interest rates on saving accounts.
• Despite the increased interest rate, money did not came back. As the banks
tighten the loan, the share market headed toward a crash, with the market likely
to see further decline
• many commercial banks were literally left without any money to extend new
loans, showing that the credit expansion of most of these banks will be likely to
come to a grinding halt. The banks have been demanding fresh financing facility
for the time being to revive their lending capacity.
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commerce campus)

3. Reasons for liquidity crunch of Nepal
• failure of the government to increase development expenditure due to which
money is not pumped in banking sector
• Lending compulsion to increase the paid of capital(unnecessary lending)
• Bank deposit depletion-falling remittance,filing taxes taxpayers withdrew nearly
Rs 40 billion from the banking system to file taxes
• Huge Corruption money out of banking system (Money not channelized to banking
system, billions of un-accounted money in physical form
• The tightening of the CCD ratio -- a rule enforced by the NRB to measure liquidity
ratio of the BFIs -- has crippled the capacity of the banks to extend lending. Banks
are currently allowed to convert 80 percent of their deposits into loans. This
means that for every Rs100 collected in the form of deposit, only Rs80 can be
extended as credit. This, in technical terms, is referred to as credit to core capital-
cum-deposit (CCD) ratio, which should stand at a maximum of 80 percent.
• Massively growing imports and declining exports in business, widening trade
deficit is another important reason for the existing crisis.
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commerce campus)

4. Ways
• government should expedite capital spending,
• NRB should inject money in the banking system, which banks can use as
fund for lending against the government securities they hold Nrb injected
repos for the solution but was too costly for the banks the rate was 4.87%
• Banks should offer higher interest rates on saving deposits to attract more
funds and retain the deposits
• Government must attract remittance through formal banking system.
Informal remittance like “Hundi” must be immediately stopped.
• Public money which is outside banking system must be attracted.
• NRB may provide some flexibility in increasing CCD ratio, but this step can
be risky for banks.
• Deposit base at bank shall be encouraged strategically (Recent Indian
strategy to bringing money back in banking system can be very helpful
here)
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commerce campus)

5. Impact on business of Nepal
• Overall credit expansion is halted hampering economic growth. 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.
• Business are suffering due to increased interest rates
• Credit is expensive due too which sharemarket investors arehesitating to invest by taking loans
• The important project are halted as loan installment are slowed by bank
• Inflationary pressures are there after earthquake due to more money in hand of consumer the inflation situation
is even worse
• lack of investment friendly environment, political instability, labour problem and high production cost, the
business community is badly back-ridden by the liquidity and credit crunch at present. “The enthusiasm of
industrialists has been killed by the frequent increase in interest rates and there are slim chances of opening new
industries
• On one hand, discouraged by the April 2015 earthquake and economic blockade, the confidence of the private
sector was enhanced with the super budget of this fiscal and there was a huge influx in the demand for loans. But
banks are suufering luquidity crisis
• The financial health of the country is weak at the moment as the financial intermediates are not so healthy
• On the other hand, in the middle of this fiscal the government’s achievement in the revenue generation has
exceeded its targets but when it comes to expenditure – it is negligible the development expenditure are low and
the investor are deprieved by loan because the money is not pumped into the economy
• Massively growing imports and declining exports in business, widening trade deficit is another important reason
for the existing crisis.
• Import shall be discouraged and Export shall be encouraged, environment to promote domestic goods in
international markets can contribute to overcome the crisis. FDI invitation, but this will be not possible until
political stability is maintained, until politician has crystal clear vision for country development
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commerce campus)