Daily Times

KATHMANDU: Manang Trade Link, the developer of the 20MW Lower Modi Hydropower Project in the Parbat district of western Nepal, is experiencing difficulty in securing regular loans installments as Nepal’s banking system has been facing issues of liquidity over the past few months.

“The bank which used to release our loan installments easily in the past, now tends to find shortcomings in our documents making the process more difficult,” complained Pashupati Murarka, chairman of the company. Murarka, who is also the president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), the apex private sector business body of Nepal, told Xinhua that the bank has also hiked its interest rate by 2 percentage points over the last three to four months. He is now concerned about whether the project could be completed in time if the bank continues to “create trouble” including not to provide the promised loans, as the contractor has already been issuing bills for the work it has already completed.

As businesses are facing the consequences of a liquidity crunch within the banking system, the Confederation of Nepalese Industries (CNI), a consortium of large Nepalese industries, drew the attention of Nepalese Deputy Prime Minister and Finance Minister Krishna Bahadur Mahara on Thursday about the problem and urged to take concrete steps to solve it. According to the CNI, the banks are not sanctioning new loans and the interest rates of the old loans have risen contributing to an increase in the cost of production. Furthermore, the projects’ construction works have stalled due to a lack of credit lines from banks.

Such a liquidity crunch with the banks can also be gauged from the fact that three quarters of the commercial banks in Nepal were in no position to lend a penny last week, according to Nepal Rastra Bank (NRB), the central bank of the Himalayan country. As per the NRB’s directive, a bank cannot provide credit of more than 80 percent of core capital and the deposit combined. “But, 21 out of 28 commercial banks crossed that limit last week, according to our observations,” said Chintamani Shiwakoti, deputy governor at the NRB.

Both the central bank and commercial bankers admit that two factors are responsible for the current liquidity crunch in the banking sector. The first is excessive lending by the banks over the last six months compared to deposit collection and the second is the Nepalese government’s failure to spend its resources, which has prevented its available funds from reaching to the banks.

According to the Nepal Bankers’ Association (NBA), the grouping of commercial banks in Nepal, the banks have lent 2.07 billion US dollars up until January 27 and since the start of the current fiscal year in mid-July. But, when it comes to deposit collection, they collected only 1.2 billion US dollars creating a huge deficit between deposit collection and credit expansion.

The banks had increased lending massively during the first half of the current fiscal year as many industrial and infrastructural projects moved ahead this year, after the economic turmoil of last year triggered by the deadly earthquake in April 2015 and the subsequent India blockade on Nepal.