Liquidity crunch leading towards credit crunch

Liquidity crunch is leading to credit crunch, according to the bankers.
"The liquidity crunch has forced the banks to delay already committed loans also," said a member of Nepal Bankers Association (NBA).
Unlike the bankers expectation that tight liquidity situation will improve from April, the situation is still not yet comfortable.
Delayed budget coupled with government’s inability to spend led to liquidity crunch in the financial sector, the banker said, adding that normally the banks face tight liquidity situation for two months every year "but this fiscal year, it has lengthened to almost one year."
Due to liquidity crunch banks are not being able to finance automobiles let alone productive sector and housing sector – a separate portfolio created by central bank on request of housing developers for easy financing facility.
Due to tight liquidity situation, some 300 vehicles have been stranded at Birgunj customs as the banks have stopped financing automobiles. "It has also hurt government coffer as automobiles is one of the key contributors of the revenue," Automobiles Dealers Association president Saurav Jyoti, said, adding that automobiles import has plunged by 40 per cent.
Similarly, housing and real estate sector is also bearing the brunt of tight liquidity situation. " in 2009-10, not a single project has been approved due to tight liquidity situation, though demand for housing is rising ,” vice president of Nepal Land and Housing Developers' Association Om Rajbhandari, said, adding that in the last seven years, only 33 housing projects have been approved.
However, the government officials and central bank do not agree. “The banks have been lending for a longer period and collecting short term deposits creating a deposit-lending mismatch that is one of the key reasons of tight liquidity," according to senior economic advisory of Finance Ministry Keshav Acharya.
"The government treasury has Rs 6.47 billion surplus by the nine months of current fiscal year, he said, adding that the amount is not that huge and on top of that the banks are buying development bonds but not interested in repo that could have injected liquidity.
“They have bought Rs 2 billion worth repo, while the central bank had issued Rs 5 billion repo last week," said central bank spokesperson Bhaskar Mani Gyawali. "Had there been tight liquidity situation, the banks would have bought Rs 5 billion worth repo," he said, adding that, on the other hand, the central bank received Rs 7 billion worth application for Rs 5 billion worth development bond last week.
Though, the bankers are claiming that Credit to Deposit ratio has gone up, central bank governor Dr Yubraj Khatiwada claimed that the CD ratio has not gone over the board. "All the indicators including CD ratio of commercial banks are sound," he said, adding that there is, however, mistrust among the banks themselves and bankers’ belief that deposit growth rate will remain constant has led to today's tight liquidity situation. "They lent aggressively believing that the deposit growth rate will remain constant," he added.
According to central bank data, the commercial banks have Rs 647 billion worth deposit by the May end. By the end of last fiscal year, they had Rs 617 billion worth deposit. "The deposit growth rate has slowed down," the governor said.