Nepal is yet again facing a liquidity crisis. Banks have cut back on outgoing loans and are also increasing deposit rates to lure more money. As the country’s trade deficit keeps increasing, remittances keep decreasing and as the financial system is also yet to fully adapt to federalism, Nepali banks are struggling to increase their deposits and maintain healthy debit to credit balance. APEX’s Sunny Mahat talks to Bharat Raj Dhakal, President of the Development Bankers Association of Nepal and the CEO of Muktinath Bikash Bank Limited, about the ongoing liquidity crisis and how Nepali financial institutions are coping.
What is your take on the ongoing liquidity crisis?
There are multiple reasons for it. Decrease in remittance is one of the main reasons. Also, when the Nepal Rastra Bank ordered banks to increase their paid up capital, banks started lending aggressively for profits, which resulted in an imbalance between deposits and loans.
I also think the use of unregulated cash has become rampant after the NRB’s new regulations against money laundering limited cash transactions. People are avoiding banking channels and a lot of Nepali currency has gone unaccounted for.
Nepal’s growing trade deficit is yet another reason for the liquidity crunch. All our money is going abroad. Nepalis are spending more on their tours abroad than foreign tourists spend here. The billions we send aboard every year in abroad studies are also not helping.
What can the BFIs realistically do to cope with this crisis?
Banks have to start contributing more to the economy. We should work with the government to increase entrepreneurship skills and resources for the youth.
We have to expand our work beyond borrowing and lending and create a lucrative environment for entrepreneurs. We can also invest in all small, medium and large projects that support the economy. Maybe banks can reduce other expenses and invest more on financial literacy and creating conducive business environment. In the end, as the country’s economy improves, all our investments will also start giving high returns.
Can you tell us what the Muktinath Bikash Bank Limited is doing in particular?
Our bank’s ideology is, “the public does not need to go to banks, banks needs to go to the public”. We are going to people’s homes, teaching them about finance and money management and trying to persuade them to join the banking channels.
Our presence is mostly in rural areas and we focus on the deprived sector. But that is the most productive sector in the country today. Our debtors invest in small-income enterprises. Our policy is to keep at least 50 percent of our investments in productive sectors.
What are your expectations from the left alliance government?
The prime minister has said the economy is his priority. With Yubaraj Khatiwada as finance minister, we are hopeful that his vast expertise and experience will help the government work out the causes behind repeated liquidity crises.
CPN-UML’s election manifesto promised double-digit economic growth, with primary focus on employment generation and agriculture. This has created many expectations. But we should understand that things will not change overnight. It is a gradual process and well should all play a responsible part in it.
How are development banks faring in this cash crunch?
The developments bank are doing well, I must say, mainly because we have spread our deposits and lending fairly among all income groups. Focusing on microfinance has made our investments safe as most of them are directed at productive sectors.
This has brought about a change in perception of development banks. People assumed development banks gave high interest on deposits and charge even higher interests on loans. But our rates are now at par with commercial banks and in many cases, our loans have become faster to process and cheaper as well.
Is there a long-term fix for our economy, repeatedly hit by trade deficits and liquidity crisis?
All Nepalis should understand how the economy works. We have become too dependent on imports and we are also spending way too much on luxurious items. Also, the government needs to do a better job of spending its revenues. Instead of disbursing them periodically and in order, it is doing so haphazardly at the end of the fiscal year, which in turn obstructs the flow of money into the financial system.
There is also a problem with remittance. Our youths go abroad to work and send back their hard-earned money. But most of that income is being spent on consumer items. We need to teach them how to save. This is why I emphasize the importance of financial literacy. Also, remittance should come via proper banking channels. Illegal hundis take the money away from the financial system.
Finally, there is a need to invest on productive sectors. We have become too dependent on luxury items. A common man’s daily expenses have increased manifold compared to his incomes. He also takes out loans for unproductive use, which puts him in debt while also hampering the economy. We have to try to keep the money in the country