Crunching the numbers on credit

Nepal’s banks are reeling under a severe credit crunch at a time when industries and businesses, buoyed by the end to the political transition, are seeking more loans than ever to finance new investments.

The crisis has already hit the energy sector, delaying by at least one year several hydropower projects with a cumulative capacity of around 1,000MW. And it threatens to escalate into a full-blown liquidity crisis,  affecting other sectors as well.

"The NRB lacks clear policies to ease the credit crunch. It just blames us for the crisis saying we are lending to unproductive sectors. There has to be coordination between the NRB and us."

Ashoke SJB Rana

CEO Himalayan Bank

Credit crunches are a chronic crisis in Nepal. In 2010, when all commercial banks heavily financed real estate deals to rake in profits, they almost emptied their accounts. The real estate bubble burst only when the Nepal Rastra Bank imposed a cap on bank loans for the unproductive sector.

Bankers now worry that the current credit crunch could last much longer than the one in 2010. But ex-Governor Yuba Raj Khatiwada, who fixed a ceiling on real estate lending, has joined the KP Oli-led communist government as technocrat Finance Minister, and he is expected to introduce a slew of measures to ease the crisis.

“The NRB blames us for financing the unproductive sector. But what is productive, and what is not? There has to be a clear indication.”

Ratna Raj Bajracharya

CEO Sunrise Bank

According to the NRB, commercial banks have already lent Rs1,952 billion of their Rs 2,207billion deposits. This means people can still withdraw their money from banks, but there isn’t enough capital for new loans.

Pashupati Murarka, ex-President of the Federation of Nepalese Chambers of Commerce and Industry, puts it bluntly: “The banks have all closed their doors to investors.”

As the credit crunch drags on, banks and the government are engaging in the usual mutual blame game. The government blames bankers for creating the problem themselves by releasing loans in unproductive sectors like real estate, automobiles and capital market.

“The largest chunk of the capital budget is spent only towards the end of the fiscal year. The tendency to spend the budget during the monsoon causes credit crunch in winter. So, the capital budget should be proportionately spent throughout the year, not just at the end.”

Bhuvan Kumar Dahal

CEO Sanima Bank

An NRB officer told Nepali Times: “This is all because of greedy banks. They want more profits, and they lend money to profitable but risky sectors like real estate.”

According to the NRB, commercial banks have already lent Rs1,952 billion of their Rs 2,207billion deposits. This means people can still withdraw their money from banks, but there isn’t enough capital for new loans.

Pashupati Murarka, ex-President of the Federation of Nepalese Chambers of Commerce and Industry, puts it bluntly: “The banks have all closed their doors to investors.”

“We have lagged behind India in digital currency. Since our economy is growing between two giant economies, we need to digitise our currency. Minimising the use of paper money is one way to ease credit crunch.”

Parshuram Kunwar

CEO Janata Bank

As the credit crunch drags on, banks and the government are engaging in the usual mutual blame game. The government blames bankers for creating the problem themselves by releasing loans in unproductive sectors like real estate, automobiles and capital market.

An NRB officer told Nepali Times: “This is all because of greedy banks. They want more profits, and they lend money to profitable but risky sectors like real estate.”

But bankers blame the government for aggravating the credit crunch by not spending the development budget. Indeed, the government has spent only 22% of its Rs3.35 billion capital budget in the first eight months of the current fiscal year, which bankers say has effectively frozen the cash and is the main reason for the current credit crunch.

“We must not solely rely on Foreign Direct Investment to keep our economy afloat. We need to ensure that our capital budget is injected into the market throughout the year. In addition, we need to bring money scattered across the informal channels into the ba+nking sector.”

Janak Sharma Poudel

CEO Global Bank IME

But there are other factors at play. The banks are refusing to go for mergers at a time when the sector is crowded. Small and failing banks have two choices: merge with each other or increase their paid-up capitals to at least Rs8 billion each. Most small banks increased their paid-up capitals by releasing rights shares, and their shareholders took loans from other banks to buy those assets. So, a huge chunk of deposit went into the unproductive capital market.

The widening gap between money deposited into banks and the amount investors are seeking is another factor. The end of the political transition has resulted in a huge growth of demand for loans not just in metropolitan cities but also in semi-urban areas. But the remittance inflow has gone down, making it difficult for banks to expand their credit reserves.

“We are branching out into rural areas to collect more deposits. But that will not be enough to end the problem. We must focus on spending more in productive sectors.”

Gyanendra Dhungana

Chair Bankers Association of Nepal

At the same time, the number of outbound Nepali migrant workers is declining and major labour destination countries like Qatar are in turmoil. This means that the remittance volume is unlikely to grow in the near future.

“Even if the current phase of credit crunch ends, there will be another phase,” says Parshu Ram Kunwar, CEO of Janata Bank Nepal. “This problem is here to stay.”