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interest free loan (US$ 43 million) provided by IMF under rapid credit facility
especially to help improve and correct balance of payments disequilibrium
in Nepal (IMF, 2010). Of the total loan, foreign debt cons� tutes 63 percent,
while internal borrowing is comprised of 37 percent as of FY 2010/11.
Nepalese economy suff ers from acute shortage of Indian currency due to
rapidly growing nega� ve balance of trade with India. Altogether 67 percent
of all types of goods comprising consump� on, intermediate and luxury
goods are imported from India. In recent � mes, consequently, Nepal Rastra
Bank (NRB/Central Bank of Nepal) sold US$ 2.46 billion to Reserve Bank
of India (RBI) for mee� ng requirements of Indian currency in Nepal equal
to Rs. 178.1 billion during 11 months of FY 2010/11 and thereby reducing
widening trade defi cit with India (NRB, July 2011). Moreover, exchange rate
of Nepalese currency (IC Rs. 1 = NRs. 1.60) is fi xed with Indian currency
pegged with US dollar for a long period and also Nepalese currency is not
conver� ble to Indian currency. This is further manifesta� on of Nepal's
increasing dependency par� cular on India, which must be improved through
expedi� ng exports to India that calls for reviewing exis� ng Nepal-India Trade
Treaty.
During the same period commercial banks suff ered frequently from
liquidity crunch rela� vely for a long span due to increasing credit-deposit
(C/D) ra� o as high as 90 percent, declining Statutory Liquidity Ra� o (SLR),
withdrawal of money from bank deposits to invest in stock market and
purchase gold and ornaments, increasing fl ow of remi� ances through hundi
and capital fl ight, sudden rise in the government cash balances, holding of
cash in informal sector, low interest on deposits and growing size of NPA.
Although NRB made a series of interven� ons by providing Rs. 75 billion
short term loans under repo and reverse repo auc� ons and also extending
refi nancing facili� es to development banks and fi nance companies as a lender
of the last resort, commercial banks further pressed to NRB for addi� onal
liquidity to mi� gate the exis� ng problem facing fi nancial ins� tu� ons.
However, deposit mobiliza� on at commercial banks leveled at Rs. 656
billion as of June 2011 and loans and advances increased to Rs. 574.6 billion
during the same period (NRB, July 2011). A majority of commercial banks
failed to balance investment por� olio management resul� ng in excessive
concentra� on of loan to real-estate sector and share margin lending as high
as 60 percent.
NEPSE Index rapidly declined from around 814 in mid-February 2008 to
a minimum 297.6 in mid-June 2011 (Nepal Stock Exchange, June 2011). In
recent years, IMF has been apprehensive of growing number of commercial
banks (31), development banks (87), fi nance companies (80), coopera� ves
(22,646) and micro-credit ins� tu� ons, NGOs with limited banking facili� es
(45), and postal saving units (117) (Economic Survey, July 2011) and strongly
recommended to review quan� ty as well as quality of services provided by
fi nancial ins� tu� ons in Nepal. Prolonged liquidity crisis is a threat to smooth
func� oning of economy, which is en� rely a� ributed to lack of fi nancial
discipline and eff ec� ve corporate governance in fi nancial ins� tu� ons
Changing paradigms of aid eff ec� veness in Nepal 25