December 12: Banks have predicted that the liquidity crunch will further worsen in mid-December to mid-January. During this period, industrialists, entrepreneurs, and the banks themselves pay large sums of money in taxes to the government, which is expected to worsen the liquidity crunch in January.

Paying taxes to the government is not the only reason liquidity crisis. Since the country is reeling through the liquidity crunch from the beginning of the current fiscal year and there is no immediate source of deposits, banks estimate that the transfer of billions of rupees from the banking system to the government account will put more pressure on liquidity.

Anil Kumar Upadhyaya, president of the Nepal Bankers Association, said the problem of liquidity crunch might worsen in January as banks along with industrialists pay huge sums of taxes to the government. As a result, liquidity is expected to increase.

In light of the current situation, banks and financial institutions are making preparation to address the liquidity crunch. A meeting of the Nepal Bankers Association was held on December 10 but could not take a concrete decision. Upadhyay said that discussions were held to seek solutions to the crisis. He said that the meeting also decided to discuss the current situation with the CEOs of development banks and finance companies. "We will decide our next approach after holding discussions with them," he said. 

Banks and financial institutions fix new interest rates for deposits and loans effective from the 1st of every month. As January is approaching, banks are now discussing their next move on new interest rates.

Banks have been raising interest rates on deposits since September due to lack of liquidity. However, banks are in a dilemma whether to raise interest rates in January as deposit collection has not improved. Upadhyay argues that the Ministry of Finance and Nepal Rastra Bank should provide necessary support to BFIs in order to address the liquidity crisis.

"Raising interest did not increase deposit collection. Therefore, most of the banks are not in favor of raising interest rates," Upadhyaya said, adding that the interest rate should be finalized by the end of December without any delay. 

A major source of banking liquidity is government spending. However, government expenditure remains poor in the current fiscal year. As a result, the banking sector is facing liquidity crisis.

At the same time, inflow of remittance, another major source of liquidity, has declined. On top of that, the banks have extended a large amount of credit in this fiscal year. As a result, the banking sector has been reeling through the liquidity crisis since the beginning of the current fiscal year.