Three year long liquidity shortage and rising interest rates; are we looking at the wrong direction?

Aakriti Thakali

Nepal is a small economy, no doubt on that but does being small normalize such prolonged liquidity shortage in the market? The liquidity shortage used to be a seasonal problem that would get away within 3 to 4 months but this time months has changed into years and we're still figuring out how to address it.

We can't say that efforts haven't been made, but we can ask were those efforts right? The Nepal Bankers' Association (NBA) signed Gentlemen's agreement to fixate the interest rate multiple times, and it got revoked the same number of times. Putting a cap on interest rate in a free economy might seem like cartelling to some and for some it might be a diligent move given the market condition. But that is not our concern right now, our concern is, "Was that effort right, did it ease liquidity?"

In one sentence – no the agreement didn't ease liquidity, it was just a means to avoid unnecessary interest rate hike in the market until the liquidity eases. So if this is the fact then what action plans were being planned to address the liquidity shortage other than the world famous "wait and watch" strategy?

The government has assigned an investigative team which is going to draw suggestions for the current mess. While that is going on, the latest Gentlemen's Agreement has again been revoked and rates have gone as high as 13%. When commercial banks raised their rates, it created a simultaneous effect in other class banks too.

Sunanda Shrestha, CEO of United Finance, says, "All of the finance companies had agreed tokeep the interest rate below 12% long back and we were all sticking to it, but now we had to increase to 13% not to attract new customers but to retain the existing clients." This means banks are now fighting amongst themselves for deposits and new funds aren't being generated.

Addressing the same problem, Deputy Governor of NRB, Mr. Chintamani Siwakoti said, "The NRB can't directly alter the banks' rates as they have the liberty to decide their own rates. However, the state budget has been disbursed and state governments can deposit 50% of it in their account. This will add liquidity worth Rs 3.5 arba into the system."

NMB Bank is one of the few who hasn't raised their rates. Mr Sunil KC, CEO of NMB, at a product launch event said, "The liquidity shortage has become a long-term problem, so we need to look at long term solutions for it." To find the best possible solution for any problem, issue analysis is necessary and when we know the root of the problem effective course of action can be devised. According to Mr. KC, one of the reason for liquidity crisis is the decreasing trend of National Gross Saving. Currently, Nepal's gross saving is only 11%-12%, which means up to 89% of income is spent and most of them are going out for import. Mr. KC added, "Our imports are increasing at an average rate of 40% for past few years and if we can decrease this import, our money will remain in our country and in our banks and this liquidity shortage will cease to exist"

Along with NMB there are other banks who have started to prioritize lending in energy sector, agriculture and entrepreneurship. These are great initiative and they have already received support from government and now they need support from the general public.

You as a saver, it is obvious to choose a bank that gives higher rate and that is exactly why many people are shuffling banks now. However, unlike other sectors Financial Industry is a block chain. When one falls, chances are others will too. All the financial institutions, banks, finance companies, microfinance, insurance, stock market and economy are interdependent and interconnected and that is why it requires stringent regulation.

On an interview a few days back, Mr Rajan Singh Bhandari, ex-CEO of Citizen Bank International, had said that to ease this liquidity each party – the bankers, the NBA and the NRB – have an exclusive role to play. When large banks like Nabil bank, Nepal Investment bank and Himalayan Bank started to raise their rates, their reason was "we did so to retain our existing clients", which shows even the most reputed banks' customers are interest sensitive rather than loyalty based.

So adding to what Mr. Bhandari said, along with banks, NBA and NRB, we savers also have a role to play. Our economy is remittance based and even the money that comes as remittance goes out for importing vegetable, fruits and energy. Now that the interest subsidized loans are available we can start a hotel or a poultry or a fishery or commercial farming. This will decrease our dependence on import and our money will remain here.

Similarly after this year's Monetary Policy, graduates can get loan against their certificates and you can invest in your idea, be your own boss. So rather than just blaming the country maybe we can start looking within and hopefully we'll find answers there. This doesn't mean that government is doing enough, but it also not fair to point finger to others when we aren't doing anything at all. Like they say, "Charity begins at home".