After nearly two years of abundant cash flow, Nepal’s banking sector has faced a cash crisis. With the cash flow declining, financial institutions and banks have increased the interest rate.

Because of abundant cash, the interest rate earlier was below 3 percent and the interest rate in lending was also lower. However, the situation will change now. Almost all commercial banks have already increased the interest rate to lure the depositors.

This will affect the interest rate in loans. The remittance inflow to Nepal has slowed down in the recent months. Despite the efforts of the government, the capital expenditure is still at an average 15 percent.

The remittance increased by only 12.6 per cent in the first eight months of the fiscal year, according to the central bank, whereas in the same period last year the remittance inflow had increased by a whopping 65.3 per cent.

The current trend suggests that the average remittance inflow in the current fiscal year could not exceed 12 per cent. Last fiscal year's average rate of increment in remittance inflow was 47 per cent.

Following NRB’s directives a few months ago giving more space of remittance companies, the flow of remittances has declined. The bankers had then warned that the ‘discriminatory provision’ would not only cause banks to lose business but ‘encourage Nepalis employed abroad to rely on informal channels to transfer funds home because banking network has not expanded to many rural areas’.

However, given the current cash flow, Nepal Rastra Bank has issued another statement. In a directive, NRB said banks, financial institutions and remittance companies can make remittance payments of up to Rs 100,000 in cash, while payments exceeding that amount have to be made through cheques or deposited in bank accounts.

Earlier, NRB had made it mandatory for commercial and development banks to make use of common exchange rate here and abroad. Bankers had complained this provision gave undue advantage to remittance companies, because public exposure of such rates would provide leverage to those engaged in illegal money transfer to mark up exchange rates to rope in clients.

Although Nepal Rastra Bank (NRB) has loosened its restrictions on the amount of remitted money, banks and financial institutions (BFIs) can directly pay to clients, it is yet to be known how it will increase the flow of money.

As the political instability continues, any possibility of increasing the capital investment is yet to be seen. With the remittances flow and capital investment declining, Nepal’s banking sector has to face the cash crunch in the coming days.