Nepali Times
Liquidity crunch or crisis?


On Wednesday, 30 December, Himalmedia convened a discussion of bankers and government officials about the liquidity crunch in Nepal.

Krishna B Manandhar, Deputy Governor, Nepal Rastra Bank
In the last 5-6 years, remittance grew at 20 to 50 per cent a year. Everybody seemed happy since there was cash coming into the country.

Then in September/October, remittance growth slowed and liquidity injected from NRB dropped to 40 per cent. Since there was major reduction in the source, naturally liquidity became tight.

There are two causes of the liquidity crunch. First, there was a dramatic increase in imports, especially of gold. Contrary to popular belief, the rise in gold imports wasn't caused by a price differential with India. Actually, the import of gold coincided with the increase in the price of gold in the international market. It became a lucrative investment because gold is an extremely liquid instrument.

For the first time in 36 years, there is a deficit balance of payment of Rs 19 billion in the first quarter. BOP has been in deficit only four times in our history.

Second, private sector credit growth is higher than deposit growth, which automatically results in tight liquidity. Therefore, NRB issued guidelines. We didn't issue it earlier when the real estate market peaked because commercial banks didn't have alternatives to invest. We didn't want to spread panic.

Manish Kumar Singh, Bank of Kathmandu
NRB took repo auction as a rescue measure but a longer term measure would be preferable. Even after the repo auction, monetary demand has not been fulfilled, which has raised the interest rate. This is a crisis and NRB is not taking measures to lower the interest rate. If NRB issued treasury bills, the repo auction could be scaled back, which would reduce panic.

Ratna Raj Bajracharya, NCC Bank
Half the problem is created by NRB, although there are outside factors, namely the increase in imports and decrease in remittances. There is enough liquidity in commercial banks from fixed deposits. My gut feeling is that within commercial banks, 20-30 per cent of deposits are call deposits. NRB is making money from it.
Also, what's the use of treasury bills if NRB doesn't redeem them?

Parshuram Chhetri, Bank of Asia
We need a long-term solution. For that exports have to go up, remittance growth should go up and more FDI should come in. However, we are so dependent on imports, it will be hard to bring that down. It is better to encourage foreign investment, which is not possible unless the labour problems are solved.

The short-term solution is to issue treasury bills. NRB should allow them to be cashed at a predetermined rate.
Commercial bank cash should also be seen as a short-term cash reserve ratio (CRR). While revenue collection is being done through commercial banks, they stay in NRB vaults. Instead, why not invest the surplus cash in commercial banks with its own account? We are confused, is NRB in favour of increasing the interest rate, or reducing it?

The real estate bubble was a problem but was not responsible for the liquidity crunch.

Janak Sharma Poudel, Global Bank
To ease the current liquidity crunch, a certain per cent of the liquid cash in vaults should be counted as CRR. The media also shouldn't create panic in the public. As for a deposit ceiling, noone wants to deposit more than Rs 1 million. For instance in real estate transactions this keeps changing hour by hour and they don't bring the money to the bank. Money from the public is not going into the system.

ATMs have also contributed to the cash shortage. Hundi and capital flight are responsible for the liquidity crunch. NRB must intervene to reduce imports and check capital outflow.

Siddhant Pandey, Ace Development Bank
Banks should know that putting 25 per cent of your portfolio in one sector is very risky, yet NRB has to remind them.
Meanwhile, the media is hurting confidence in the market. People prefer physical gold to paper gold just to keep in the house. Confidence has also been hurt because the development budget is frozen.

Indra Raj Humagain, ID Bank
There is lack of confidence in the market among customers for various reasons. While NRB and the government are partly responsible, the media hasn't helped by sensationalising economic problems. Depositors are safety-sensitive not interest-sensitive.

It also didn't help that 3.5 per cent of corporate deposits in 150 financial institutions went to NRB.

BN Gharti, KIST Bank
I prefer the word 'crunch' to 'crisis'. It is a crisis when we can't pay our depositors when they want to withdraw. A crisis occurs if there is a deficit of Rs 5-7 billion.

Kumar Lamsal, Sanima Bank
There are many reasons but the real one is the lending growth rate exceeded the deposit growth rate. We should understand the increased lending and double deposit.

Bhuvan Dahal, Nabil Bank
Trade deficit has widened to 50 per cent. Real estate has indirectly contributed to the crunch. As people profit from the rise in real estate prices, their expenditure levels have gone up. There were Rs 8 billion worth of imports in the last three months. By discouraging people from buying vehicles, we can increase local tax. Hundi should be brought into the system.

Fiscal interventions, not monetary policy, will solve the problem.

Rajan Singh Bhandari, Citizens Bank
Defaults on home loans or vehicle loans is less than one per cent, bank exposure is not risky, and we are within NRB norms. The media must not spread panic.

Jhapat Bohara, Development Bankers Association
Seventy per cent of the population is not banking so you can't say there are too many banks. However, CRR has to be reduced.

Keshav Acharya, Advisor, Ministry of Finance
Non-economic factors rather than economic factors have brought about this situation. The security situation is bad and investment cannot be encouraged. Money is used to earn additional money, rather than a means to a productive end. I agree with NRB's intervention, money should have impact on the economy, not just on the money market.

The budget was delayed by five months, which has kept money out of the market and made the crunch worse. The government should not just renew treasury bills, but also redeem them.

The government will soon introduce payments by cheque for more than Rs 1 million.

1. gaule hero
Looks like NRB had to inject massive amount of liquidity into the banking system through repos in Oct-Nov because of shortage of cash, and this had nothing to do with the seasonality of liquidity requirements. How could such thing happen? Is it because Nepal's banks' cash management strategy relies entirely on new money coming from abroad in the form of remittances? If so, that explains the unfolding events. When foreign funds dried up (remittances were still coming in albeit at a slower rate but now they had to be used to finance the ballooning trade deficit and import of gold) Nepal's bank had to turn to the lender of the last resort NRB for emergency cash. If this is the reason, then NRB should implement more reliable cash management policies for banks that do not depend on fickle foreign-originated money. A more serious question for NRB and the nation as a whole comes when either (a) remittances totally dry up or (b) country goes into current account deficit because the amount of remittance is not enough to offset rising trade deficit; this could happen because NRs is kept artificially high through its peg to IRs; currency theory suggests that NRs should have depreciated against IRs a long time ago given the difference in two countries growth and inflation.

(11 JAN 2013 - 17 JAN 2013)