Despite some improvement in Mangshir, the liquidity situation in the banking sector is expected to remain tighter until around mid-January. While the deposits of commercial banks surged by Rs 58 billion in Mangshir (mid-November to mid-December), lending has remained sluggish as banks disbursed only Rs 2 billion in loans last month. Bankers and economists attribute multiple reasons for this situation. A large number of taxpayers will pay taxes by withdrawing money from the banks as the government gets the first installment of income taxes in mid-January in line with the Income Tax Act.

With the government running in a fiscal deficit with revenue insufficient even to meet the recurrent expenditure, it is expected to continue the internal borrowing which will mount further pressure on liquidity.

The banks are also required to repay the refinance to the Nepal Rastra Bank (NRB). The outstanding amount of refinancing provided by NRB remained at Rs 102.60 billion in mid-November 2022, according to the central bank. The provision under which the banks can count 80 percent of reserves funds of the local government as deposits, is also expiring in mid-January. “Over Rs 40 billion is expected to go out from the banking system to pay the tax to the government,” said Sunil KC, CEO of NMB Bank, adding that the government is expected to absorb an additional Rs 30 billion through internal borrowing. When the financial resources go into the government treasury, it takes time to bring those resources from the government treasury. “It is because the government is weak at spending, particularly the capital budget,” said another banker. "Our only hope is that government spending may accelerate relatively because its existing revenue collection has not been able to make up recurrent expenditure too. If not for capital expenditure, money to be observed by the government can come up to spend for administrative works.” The banking system has faced a prolonged liquidity crunch, particularly from the second quarter of the last fiscal year, due to massive lending for imports in the early months of the last fiscal year. Due to a mismatch between lending and deposit collection, the banking system faced a shortage of loanable funds. With deposits not growing as expected, the system faced a prolonged liquidity crunch. However, a senior Nepal Rastra Bank official said the liquidity crunch has eased to some extent as deposits surged since mid-October while lending grew only marginally. Since mid-Oct, deposits in the banking system grew by around Rs 80 billion while lending grew by just around Rs 2.5 billion till mid-December, according to NRB. A senior NRB official said that this has helped to reduce the credit-to-deposit ratio of commercial banks to around 86 percent down from over 90 percent in the early days of the current fiscal. One contributing factor for improved deposits is also that commercial banks could count 80 percent of the reserve funds of the local governments as deposits. Likewise, inflows of remittances have increased in recent months along with the rise in the outflow of Nepali migrant workers contributing to deposit growth. Remittance inflows increased 20.4 percent to Rs 378.04 billion in the first four months of the current fiscal year against a decrease of 7.0 percent in the same period of the previous year, according to NRB. In January this year, the central bank allowed the commercial banks to count 80 percent of reserves funds of the local government as deposits, up from 50 percent earlier. Though the provision was first arranged till the end of the last fiscal year, it was extended till mid-January considering the continued liquidity crunch in the banking system. Amid the scenario of the tighter liquidity situation, the banks are unlikely to lend to the private sector borrowers in significant amounts even though the government lifted import restrictions on vehicles, liquors, and expensive mobile sets in mid-December. According to a banker, the ongoing liquidity crunch and high borrowing rates will discourage imports despite the lifting of import restrictions. “Because of high inflation and interest rates, demand in the market has slumped,” said the official.