Liquidity crunch may lead to credit crunch

Current liquidity crunch could lead towards credit crunch, if the government spending doesnot increase.
"We will be heading towards credit crunch, if deposits donot increase significantly and government spending does not pick up," according to Nepal Bankers' Association (NBA) president Sashin Joshi.
Government spending has seen nominal rise in an absence of budget putting pressure on the banks that has forced to hike interest rates to adjust the rising cost of funds. The government has been able to spend Rs 68.83 billion -- including capital and recurrent expenditure -- in the first six months of the current fiscal year, wheras the spending was over Rs 80 billion in the same period last fiscal year.
"But I expect gradual easing up of liquidity crunch in the next couple of months," Joshi said, adding that last week witnessed a rise in commercial banks' deposit by Rs 2 billion to Rs 628 billion. "However, the liquidity is still tight."
Delayed budget and government's inability to spend has tightened the liquidity in the market. The government is sitting on Rs 29 billion creating a tight liquidity situation in the market, according to economists.
"There are many reasons for liquidity crunch including government sitting on the funds that could have already been released easing the crunch, had the budget come on time," said Upendra Poudyal, chief executive officer of the NMB bank.
The government, however, claims that it has released the fund. "As the budget was announced late by four months on November 20, the finance ministry has released the fund on November 21," said the finance ministry. But he could not explain, where the fund has stuck. "In absence of government spending the capital formation has also hit hard."
The country is not only witnessing the liquidity crunch, there has been no new jobs creation too, in absence of the lending to the productive sector that is going to hit the economic growth hard. The government has projected 4.5 per cent growth for the current fiscal year.
The liquidity crunch also forces the banks to raise the lending rates as their cost of fund increases. The rise in interest rates will hurt the borrowers, finally making them unable to loan servicing like the real estate is facing at present.
"Problems in servicing of real estate loan and credit to deposit (CD) ratio also aggrevated the situation, Joshi said, adding that the banks credit could be around Rs 570 billion.
According to the central bank regulation, the banks have to maintain Credit to Deposit (CD) ratio that has also pushed the short-term interest rates higher relative to those in the same period last year.