Why does the credit crisis keep repeating itself?

30 November 2018

Bankers met at a Himalmedia Roundtable last week to discuss the recurring credit crunch

Nepal’s cyclical credit crunch has re-emerged yet again, putting the economy in the doldrums and portending that the country is not likely to achieve its target of 8% growth this fiscal year.

Banks are not lending any more, bankers are avoiding big loan seekers and new infrastructure projects are not taking off. Hydropower investor Gyanendra Lal Pradhan says: “Almost all banks have shut the door on borrowers.”

Commercial banks have already lent Rs157 billion in the first quarter of the current fiscal year, and they do not have any more loanable funds. One of the major reasons behind the current liquidity squeeze is the government’s failure to spend its development budget.

When Nepal got a strong and stable government after years of war and political instability, banks had hoped that development budget would now be mobilised more efficiently and they would not face a crunch in the middle of a fiscal year.

However, even the strongest government ever with a technocrat Finance Minister has failed to fix the problem of spending the bulk of capex only towards the end of a fiscal period. This has resulted in the scarcity of loanable deposits for the third year in a row, turning it into a chronic banking crisis.

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The government has collected Rs303 billion in revenue so far this year, but only Rs245 billion has been spent. And the largest chunk of expenditure is for recurrent expenses, which does not help ease the credit crisis. Almost Rs58 billion remains unspent in the state exchequer.

But experts say the government’s inability to mobilise development budget is not the only major reason behind the recurrent credit crunch. At a Himalmedia Roundtable last week, bankers blamed the government for not spending its development budget efficiently. But they also admitted that there are other factors at play. Excerpts:

Ashoke SJB Rana

CEO, Himalayan Bank

The political transition may have ended, but the banking sector is still in transition. Banks have been forced to increase their paid-up capitals, and take stricter and even impractical measures to collect customer details to help the government combat money laundering. This has hampered deposits at a time when there is a huge demand for credit. And imports have surged like never before, further compounding the crisis. It has become the new normal to lend up to 78% of loanable deposits within the first quarter of a fiscal year. This is scary.

Govinda Gurung

CEO, Civil Bank

We now have political stability, and the scope of investment is rapidly expanding. So there is a greater demand for loans. But we have the same old mechanism of spending capital expenditure. The government is collecting more than Rs1 billion in revenue every year, but is not spending its development budget. Also, new monetary policies allow borrowers to pay back loans in US dollars within 180 days –- up from 120 days last year. As value of US currency increases, borrowers tend to wait until the last day to pay back. It has also aggravated the crisis.

Bhuwan Dahal

CEO, Sanima Bank

Commercial banks have not been able to manage their assets and liabilities effectively because Nepal Rastra Bank (NRB) has not properly followed the guidelines of the Basel III framework, which requires financial regulators to put different credit-deposit ratio rates on different types of deposits. For example, if we have long-term deposits, we should be allowed to lend more. But we have a universal credit-deposit ratio of 80% for all kinds of deposit.

Ashok Sherchan

CEO, Prabhu Bank

The informal economy is huge and the largest chunk of money spent in last year’s elections did not come to the banking system. Almost 90% of remittance withdrawn from banks does not return to the banking system. So we need to inject money circulating in the informal economy. For this, the NRB should review the cap on cash transactions. If it is increased to Rs3 million from the current cap of just Rs1 million, more money will flow into the banking system. Efficient mobilisation of capex alone will not fix the problem.

Kiran Kumar Shrestha

CEO, Rastriya Banijya Bank

As a government-owned bank, we are not facing a crisis like commercial banks. But we are also affected. Only 40% Nepalis have access to banks. A majority of people, especially in villages, are not being served by the banking sector. Rural people tend to deposit money for longer periods than urban people, so banks must branch out into villages to increase their deposits. The government has made it mandatory to open branches in all municipalities and village councils, but administrative areas of some village councils are so large that we must open branches in each ward.