February 20: The financial market of the country is facing 'credit crunch' not 'liquidity crunch' as rumoured, said economists. Considering the current prevailed credit crunch, cash reserve ratio (CRR) of banks and financial institutions (BFIs) should not be reduced, they opined.

As per them, the current condition is of BFIs being unable of extending their loans, however the BFIs still have 20 per cent liquidity remained after 80 per cent credit to core capital-cum-deposit (CCD) ratio, they claimed.

Economists and Former Director of Nepal Rastra Bank (NRB) Prof Dr Bishamber Pyakurel suspecting that the NRB is preparing to decline CRR, requested to decline such idea. According to him, the BFIs should control loan extension in present scenario.

The economists concluded that if the current speed of loan extension continues, the national foreign currency reserve may suffer. "The current scenario has arrived with the decline of capital expenditure and the rigidity of BFIs of earning regular profits," he said.

According to him, apart from diffused and fragile inspection of NRB, lack of co-ordination between Nepal Planning Commission that approves projects, bodies that prepare annual budget and higher commissions leading political power are all responsible for current circumstance.

Moreover, the NRB directive of increasing paid-up capital of all BFIs also play significant role in the arrival of current condition. When BFIs floated further public offerings and right shares to increase their paid-up capital, investors started investing in these tools through margin lending. As a result, a big portion of bank loan able amount went to unproductive sector which is a notable reason of the current crisis, the economists concluded. Similarly, previously the commercial banks used to provide minimal interest to savings but high interest to institutional deposits. Due to which general investors got attracted to other financial institutions. Now that the commercial banks are gradually increasing the deposit interest rate, improvement in the current scenario is expected, they opined.

As per the NRB statistics by mid-January, the CCD ratio of BFIs has reached 15 per cent which is under the limit of 20 per cent set by the central bank. However, as per the statistics of Nepal Bankers Association, the BFIs have extended Rs 1611 billion loan of the Rs 1595 billion limit that shows exceeding the loan limit. Thus, the NRB is already late on inspection, the economists pointed out.

In order to improve the current credit crunch, the government should also increase the capital expenditure, they exclaimed. The government has spent only 16 percent of capital expenditure in the seven months of the current FY. If the government do not take immediate step to increase the capital expenditure, the whole economy may tear apart, they lamented.