By the end of the first quarter of the current fiscal year, banks and financial institutions had accumulated more than 1.11 trillion rupees in loanable funds (excess liquidity). Liquidity has been accumulating in banks for the past two and a half years. The increase in remittances in recent days has accelerated the accumulation of money in banks.

With the expansionary budget and monetary policy in the current fiscal year, it was expected that credit flow would increase and the loanable amount accumulated in banks would decrease. In the initial months, signs of increasing loan demand were seen. However, banks say that credit expansion has almost come to a standstill due to the uncomfortable situation created after the protests on 23 and 24 Bhadra. This is why deposits in banks and financial institutions are continuously increasing, while the amount available for lending is also accumulating.

As of last Saturday (29 Kartik), total deposits in banks and financial institutions are 752 billion rupees. The credit-deposit ratio (CD ratio) of banks and financial institutions during the same period is 74.31 percent. As per the instructions of the National Bank, banks and financial institutions are allowed to lend up to a maximum of 90 percent of total deposits. The total loan flow of banks and financial institutions during the same period is 5639 trillion rupees. 

Based on the above data, banks and financial institutions have a loanable amount of Rs 1.12 trillion (excess liquidity) as of mid-Ashar. However, banks and financial institutions must keep 20 percent of their total deposits in cash in banks. When all banks maintain liquidity at a rate of 20 percent, the amount spent is equal to about one percent of the CD ratio.

Although banks and financial institutions are allowed to maintain a CD ratio of up to 90 percent of deposits, they are allowed to go up to 89 percent (give loans) because they have to maintain 20 percent liquidity. Even based on these facts, experts say that banks and financial institutions have a loanable amount of around Rs 1.037 trillion in the financial system as of 29 Kartik.

Remittances are increasing at a high rate, but credit flow has not increased, according to former member of the National Planning Commission Prakash Kumar Shrestha. 'Imports have increased. But they have not yet reached the level of the fiscal year 2089/80. Currently, imports are up to Rs 156 billion on a monthly basis. While remittances are inflowing more than Rs 200 billion on a monthly basis. This is why there is excess liquidity in the banks,' he said, 'Even though interest rates are low, liquidity is increasing and even after further reductions in interest rates, there is no possibility of credit flow, so the economy is in a liquidity trap.'

Shrestha said that depositors have been hit the hardest by excess liquidity. 'Because the average inflation rate is low, the interest rate on deposits has not gone negative even though it has gone down a lot. But depositors are suffering a lot right now,' he said, 'Since government spending has not increased much and bank credit flow has not increased, money has not reached the hands of citizens. Due to this, consumption has not increased.'

When interest rates were high, borrowers used to suffer because they had to pay expensive interest. Shrestha said that depositors are suffering now because there is excess liquidity. He suggests that the government should work the most to manage liquidity.

'The government and private businessmen are the ones who use liquidity. To some extent, consumers use it for consumption,' Shrestha said, 'If money is not in the hands of the general consumer, the private sector has not been able to expand its investment due to weak confidence. There is extreme political instability in the country, and there has been no improvement in good governance. That is why there is a problem.'

The government has opened up foreign investment for Nepalis in sectors including information technology. He suggests that the government should open up foreign investment for Nepalis in some other sectors. 'In the short term, banks can also be opened up for foreign investment for liquidity management. Doing this can increase the return of banks,' he said, 'The Nepal Rastra Bank can increase the mandatory cash reserve (CRR) for the immediate period. By doing so, the amount in the banks reaches the Nepal Rastra Bank. By doing this, the next time the CRR is tightened, it can be relaxed.'

He said that the private sector should be encouraged to expand investment by giving them full security guarantees and boosting their confidence. ‘We have a very strong external sector, excess liquidity, low interest rates, but we are unable to do anything. This is a situation like begging with a golden bowl,’ he said, ‘To improve this situation, the government should increase spending and make many policy reforms.’

After the continuous increase in liquidity in the market, the Rastra Bank is also regularly withdrawing money from the market. The Rastra Bank, which has been withdrawing money from the market for short periods (7, 17, 21 days) in the previous months, has been withdrawing money for long periods (175 days, 84 days) in recent days. The Rastra Bank’s withdrawal of money for a long period can be understood as a sign that liquidity will not decrease for some time. This week, last Sunday, the Rastra Bank withdrew Rs 50 billion for 84 days. 

Guru Prasad Poudel, spokesperson of Nepal Rastra Bank, said that the Rastra Bank is closely monitoring the situation of excess liquidity in the financial system and is managing it through various monetary instruments as needed. ‘The Rastra Bank is working regularly to manage liquidity. "The monetary policy tools are sufficient for that," he said. "Mainly because a large number of young people have left, market demand has decreased, while remittances are increasing at a high rate because they have sent money to Nepal. That is why deposits and excess liquidity are increasing regularly in banks." Poudel said that although the work they have done in liquidity management is sufficient, the NRB alone cannot do anything to expand investment. He said that the main task of increasing investment and demand is the government's, and the NRB can help in that. "Due to political instability, Gen-G movements, and other factors, the confidence of citizens has decreased in the country," he said. "All banks are ready to expand investment, there are sufficient resources. Now we need to be able to increase the confidence of citizens." In the last fiscal year, the NRB has set a target of expanding credit by 12.5 percent. To meet this target, banks and financial institutions had to expand credit by 682 billion rupees. But the credit disbursed by banks until last Ashar was 251 billion rupees less than the target. The NRB has set a target of expanding credit by 12 percent for the current fiscal year.

The National Bank, which had set a target of 11.5 percent credit expansion in the fiscal year 2080/81, had set a target of 12.5 percent for last year. Despite the fact that the credit expansion target was not met in previous years, a target of 12 percent has been set again this year. But only Rs 82.93 billion has been disbursed as of last Asoj. This is only 1.5 percent more than the first three months of the last fiscal year. During the same period, the deposit collection of banks and financial institutions increased by 3 percent to Rs 218 billion.

Former President of the Nepal Bankers Association Bhuwan Dahal also believes that the government should make the most effort for more liquidity. He says that the government should invest the money with banks in large infrastructure construction, hydropower projects and other productive sectors. However, for the time being, he suggests that the limit of foreign currency (non-deliverable forward NDF) that banks can keep outside the country to manage foreign currency risk should be increased.

Currently, banks are allowed to keep up to 25 percent of their net worth outside the country to manage foreign currency risk. ‘If I were in the bank at that time, I would have requested the National Bank to provide the facility to keep the excess liquidity of the banks abroad,’ Dahal said, ‘However, this is only a short-term improvement. For a long-term solution to the excess liquidity, the money should be used in infrastructure construction and productive sectors in the country.’ He says that doing so will not reduce interest rates further, but will also use liquidity. 

Chartered accountant and former banker Analraj Bhattarai says that banks and financial institutions should expand the scope of investment for liquidity management. ‘Currently, banks are not allowed to do more than provide loans. There are also controls on investment in the stock market. Now investment in the stock market and other sectors should be completely opened up,’ he said. ‘If banks are allowed to do other investment activities than providing loans, the market demand will increase. The economy will be dynamic.’ 

Bhattarai says that since the common citizen is not in a position to get money, the government should increase spending and reach the lower classes of society. ‘Banks can provide loans for various types of consumer goods. This will increase market demand,' he said, 'and it can expand credit in other investment sectors as well.' Financial sector experts say that the government should now focus on expanding investment as the external sector of the economy is strong and interest rates have come down significantly. Financial sector experts say that the credit demand has not increased due to the uncomfortable situation created after the Gen-G protests when there were signs of improvement in the economy.