Kathmandu. In recent months, the country’s financial system has been caught in a vicious cycle of liquidity traps. The financial system has fallen into a vicious cycle of liquidity trap as the loan flow is very low in the same proportion despite the increase in investable amounts.
By the end of the first quarter of the current fiscal year, more than Rs 1.25 trillion of loans have not been mobilized in the banks and financial institutions. Experts say the country’s financial system is mired in a liquidity trap, especially at a time when remittances have been historically rising.
Failure to invest even if there is more money to invest can be seen as a liquidity trap. There were signs of an expansion in credit demand in the initial months of the current fiscal year, especially after the budget expansionary and flexible monetary policy for the current fiscal year. However, banks believe that the uncertainty in the market due to the Genji agitation on September 23 and 24 and the violence that followed has weakened the investment psychology of the private sector. Deposits have been steadily increasing due to the slowdown in credit flow.
As of November 12, the total deposits in banks and financial institutions have reached Rs 7.502 trillion. In the same period, the credit flow was limited to Rs 5.639 trillion. On this basis, the CD ratio has come down to 74.31 percent, which has further widened the lending capacity of the banks. Experts say that despite the mandatory cash reserve (CRR) and 20 percent liquidity cut, about Rs 1037 billion of loans are stuck in the financial system.
Currently, about Rs 200 billion in remittances are coming in every month. However, experts say that the money is still piling up in the banks as the imports have not reached the level of the fiscal year 2080. “The fact that the demand for credit has not picked up even when interest rates are low is a sign that the economy is in a liquidity trap,” said an expert.
Analysts say that depositors have to bear the brunt of the rising liquidity. They say that after the fall in interest rates, the flow of money into the hands of citizens has decreased, consumption has not increased and there is a ‘dry’ environment in the market. “Earlier, borrowers were in trouble when interest rates were high. Depositors are suffering due to excess liquidity,” said a financial expert.
Experts believe that the government’s activism will be necessary to come out of this situation. According to them, investment expansion has been hampered by weak confidence in the private sector, poor governance and political instability. Suggestions have also been raised to temporarily increase the CRR as a short-term measure and to open up foreign investment in some sectors to banks and Nepali investors.
Experts say that the problem now is not the lack of money, but the weakening of the liquidity of money. Until the demand for credit increases, the liquidity accumulated in the banks will remain under pressure throughout the economy. ’
