Nepal’s banks are reeling under a severe credit crunch at a time when industries and businesses, buoyed by the end to the political transition, are seeking more loans than ever to finance new investments.
The crisis has already hit the energy sector, delaying by at least one year several hydropower projects with a cumulative capacity of around 1,000MW. And it threatens to escalate into a full-blown liquidity crisis, affecting other sectors as well.
Credit crunches are a chronic crisis in Nepal. In 2010, when all commercial banks heavily financed real estate deals to rake in profits, they almost emptied their accounts. The real estate bubble burst only when the Nepal Rastra Bank imposed a cap on bank loans for the unproductive sector.
Bankers now worry that the current credit crunch could last much longer than the one in 2010. But ex-Governor Yuba Raj Khatiwada, who fixed a ceiling on real estate lending, has joined the KP Oli-led communist government as technocrat Finance Minister, and he is expected to introduce a slew of measures to ease the crisis.
According to the NRB, commercial banks have already lent Rs1,952 billion of their Rs 2,207billion deposits. This means people can still withdraw their money from banks, but there isn’t enough capital for new loans.
Pashupati Murarka, ex-President of the Federation of Nepalese Chambers of Commerce and Industry, puts it bluntly: “The banks have all closed their doors to investors.”
As the credit crunch drags on, banks and the government are engaging in the usual mutual blame game. The government blames bankers for creating the problem themselves by releasing loans in unproductive sectors like real estate, automobiles and capital market.
An NRB officer told Nepali Times: “This is all because of greedy banks. They want more profits, and they lend money to profitable but risky sectors like real estate.”
According to the NRB, commercial banks have already lent Rs1,952 billion of their Rs 2,207billion deposits. This means people can still withdraw their money from banks, but there isn’t enough capital for new loans.
Pashupati Murarka, ex-President of the Federation of Nepalese Chambers of Commerce and Industry, puts it bluntly: “The banks have all closed their doors to investors.”
As the credit crunch drags on, banks and the government are engaging in the usual mutual blame game. The government blames bankers for creating the problem themselves by releasing loans in unproductive sectors like real estate, automobiles and capital market.
An NRB officer told Nepali Times: “This is all because of greedy banks. They want more profits, and they lend money to profitable but risky sectors like real estate.”
But bankers blame the government for aggravating the credit crunch by not spending the development budget. Indeed, the government has spent only 22% of its Rs3.35 billion capital budget in the first eight months of the current fiscal year, which bankers say has effectively frozen the cash and is the main reason for the current credit crunch.
But there are other factors at play. The banks are refusing to go for mergers at a time when the sector is crowded. Small and failing banks have two choices: merge with each other or increase their paid-up capitals to at least Rs8 billion each. Most small banks increased their paid-up capitals by releasing rights shares, and their shareholders took loans from other banks to buy those assets. So, a huge chunk of deposit went into the unproductive capital market.
The widening gap between money deposited into banks and the amount investors are seeking is another factor. The end of the political transition has resulted in a huge growth of demand for loans not just in metropolitan cities but also in semi-urban areas. But the remittance inflow has gone down, making it difficult for banks to expand their credit reserves.
At the same time, the number of outbound Nepali migrant workers is declining and major labour destination countries like Qatar are in turmoil. This means that the remittance volume is unlikely to grow in the near future.
“Even if the current phase of credit crunch ends, there will be another phase,” says Parshu Ram Kunwar, CEO of Janata Bank Nepal. “This problem is here to stay.”
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