Nepali Times

The genesis of the current banking liquidity crisis lies in mandatory increase in paid-up capital imposed by the Rastra Bank. A four-fold increase in serviceable capital has compelled every bank to adopt an aggressive approach to balance sheet growth, especially the ones that chose to achieve capital increase through right issues rather than through mergers.

The growth in receipt of remittances from migrant community began to slow down a couple of years ago due to issues in destination countries, mainly Malaysia and Qatar. Remittance has been a key source of deposit growth over past decade.

The Rastra Bank and two government-owned banks are the main bankers to government transactions. So taxes collected and funds/budgets released to line ministries and local bodies remain with non-private sector banks until they're spent. The government has had a poor track record in spending on capex, usually bulking them up towards the end of the financial year.

Put together, all these developments have created a scenario where most banks find themselves over-lent as there is a Credit Deposit ratio cap of 80%, which means they can lend only upto 80% of the deposits they've mobilised. The current average is 79%.

The current liquidity crunch involves scarce lendable funds rather than banks not being liquid. Equity prices are currently at interesting levels for stronger banks to consider acquiring smaller one, and reduce the number of banks to 10 or less. Mid January is the deadline for businesses to deposit 40% of taxable income based on the estimate for the current year. A large telecom company has been authrorised by the Supreme Court to repatriate its dividend that have accumulated over the years. The amount is in excess of Rs 70 billion. That expected outflow coupled with the lack of government spending have triggered a panic among banks as they offer higher rates of interest on deposits.

Ensuing competition for limited incremental deposits has worsened the situation. With very little new deposits coming into the system, this survival-of-the-fittest game has exposed the entire banking sector to a systemic risk.

The industry faced a similar crisis last year. The Rastra Bank bailed out the banks through a regulatory forbearance by relaxing the CD ratio cap. That was an not a prudent move and the same gesture should not be expected this year. This crisis will persist into end February 2018, and may resurface the second quarter again next year.

Suman Joshi is founder and chairman of True North Associates, a Private Equity company.