Easing the Nepali Liquidity Crisis

Abstract

During normal conditions, the NRB’s monetary policy is effective in tackling liquidity problems. Some of the solutions that the NRB has been pursuing are: bank mergers, lowering the CRR, lowering the interbank lending rate, and liquidity injection. Maybe NRB’s reluctance in committing itself to lowering the interest rates has something to do with the fact that inflation, which is already very high in Nepal, can spiral out of control if interest rates are too low. A viable solution to the liquidity crisis is that our government should buy the banks, with discretion and proper audit to determine which ones are good bets. The bad ones that seem like they will not survive—even with a government buyout—should be allowed to go bankrupt and exit the market. This would be a win-win situation. The good banks would survive, and the government would make some money during the process. If we do nothing, and hope the free market fixes the problem sooner or later, we risk aggravating the situation. Like the US, our liquidity crisis has also occurred due to the slowdown of our real estate market. We could also face a debt crisis very soon if we do not solve this crisis.