Kathmandu. Nepal’s banking system, which was always under pressure due to lack of liquidity to invest, is now going through exactly the opposite and complicated problem.
According to the Nepal Rastra Bank, more than Rs 12 trillion of money has been deposited in the banks at this time and the interest rate has fallen to the lowest point in history. However, the lack of demand for credit in the market even when money is cheap and sufficient indicates that the Nepali economy is stuck in a serious liquidity trap.
The continuous flow of remittances has filled the bank’s coffers. However, the economy has not been able to take advantage of the cheap interest rates due to the slowdown in domestic production and the low morale of the private sector.
According to the latest data of the Nepal Rastra Bank, more than Rs 12 trillion of investable money has accumulated in the banking system. This has led to a serious problem of ‘excess liquidity’ in the economy. On the one hand, interest rates have fallen to a historic low, and on the other hand, the entire economic cycle has slowed down due to lack of demand for credit.
This situation shows that the Nepali economy is in a ‘liquidity trap’. Even when money is cheaper, investors are afraid to take loans and start new jobs.
The main reason for this accumulation of money in the banking system is the flood of remittances from foreign employment. In the period from mid-July to mid-April of the current fiscal year, remittances amounting to USD 11.55 billion have entered Nepal.
Due to the continuous increase in the price of the US dollar, its quantity has been seen more in the Nepali rupee. This has helped fill the coffers of the banks. However, while the external sector looks strong, the domestic economy is weak.
The inability of the private sector to start new projects and the inability of old businesses to run at full capacity has brought the demand for loans to a standstill. According to experts, due to lack of demand in the market, industrialists are reluctant to take more loans and take risks.
The weighted average interest rate of deposits of commercial banks has come down to 3.40 percent and the weighted average interest rate of loans has come down to 6.77 percent. Experts say that despite such cheap interest rates, the economy is not able to take advantage of it. According to them, investment will not increase only by reducing interest rates. For this, investors need to be enthusiastic and confident about the future. Two months have passed since the formation of the new government and even after the announcement of the budget for the next fiscal year, there is not much enthusiasm in the market, which indicates the need for policy reform.
The central bank continues to struggle to manage this excess of money in the market. Till the end of June of the current fiscal year, the central bank has done more than 212 liquidity exploitation. Billions of rupees have been withdrawn from the market using various instruments such as deposit collection, bidding, permanent deposit facility and debentures.
Experts say that if the central bank does not withdraw money in this way, then there is a risk that the inter-bank interest rate will be close to zero. This can disturb the financial balance. However, this kind of withdrawal is costing the central bank an additional cost. However, they believe that the income from foreign currency investments is offsetting it to some extent.
According to economic experts, there is a serious flaw in the structure of Nepal’s credit flow. Despite Nepal’s debt-to-GDP ratio being the highest in South Asia, it has not been able to contribute much to production and job creation. In the past, most of the loans were concentrated on real estate, stock market and imports, and now those sectors are slowing down. Experts say, “Old-fashioned investment is no longer enough. It is necessary to use modern technologies such as ‘P-to-P lending’ and ‘credit scoring’ to provide loans to small and medium enterprises, startups, and agriculture. This accumulated money can be put to good use only if the collateral-based credit system can be gradually made project-based.
As the monetary policy for the coming fiscal year is ready to be unveiled, stakeholders have suggested the NRB to pay attention not only to the stability of the banking sector but also to economic growth and job creation.
According to experts, monetary policy alone cannot solve all the problems; For this, there should be a synergy between the government’s fiscal policy (budget) and the monetary policy. If the government can increase capital expenditure and send money to the market, then the morale of the private sector will be boosted and the Rs 12 trillion stashed in the banks will get an outlet. Otherwise, this paradox of money piling up in banks and slowing down may be prolonged.
