Liquidity squeeze curbs banks’ lending ability

A surge in lending amid sluggish growth in deposits combined with the central bank’s move to mop up excess cash has led to a liquidity squeeze diminishing the ability of banks to provide credit. According to the Nepal Bankers’ Association (NBA), lending by commercial banks surpassed deposit collection as of the first 11 months of the current fiscal year. Total loan issues soared by Rs248 billion while deposits increased by Rs227 billion as of June 24, according to the NBA. Total lending by commercial banks amounted to Rs1.35 trillion while deposits totalled Rs1.68 trillion as of June 24. The surge in lending resulted in the pure credit to deposit (C/D) ratio reaching 80.07 percent. As banks can also count their core capital as deposits while calculating the C/D ratio, this ratio stands at 77 percent. “This is a tight liquidity situation,” said Bhuvan Dahal, CEO of Sanima Bank. Banks cannot allow the ratio to rise above 80 percent of deposits as per the central bank’s directive. They will often impose higher lending requirements in an effort to hold on to their cash reserves. Hence, a liquidity squeeze occurs in the financial system. Lending by commercial banks has surged significantly after the trade embargo by India was lifted. “Credit demand remained pretty low for most of the time this fiscal year due to the devastating earthquake and trade embargo imposed by India, but lending grew significantly during the last three months,” said Upendra Poudel, president of the NBA. “Most of the loans issued by commercial banks this fiscal year happened in the last three months.” Due to the surge in lending, the liquidity cushion has shrunk. “At present, commercials banks have around Rs40 billion as lendable cash which is very low,” said Poudel. According to bankers, most of the loans have gone to construction, housing and margin lending. “Due to the earthquake and blockade, construction and housing had remained stagnant for a long time,” said Kiran Kumar Shrestha, CEO of Rastriya Banijya Bank. “Now the sector has revived and is seeking massive funding from banks.” Bankers said that the current tight liquidity situation would not last long as government spending would jump in the last month of the fiscal year. “With an expected government expenditure of around Rs100 billion over the first half of July, we expect the liquidity squeeze to ease by the first quarter of the next fiscal year.” Source: ekantipur