Liquidity Crunch all of sudden now has become the catch word in the financial sector. So what is this liquidity crunch? A liquidity crunch is a business condition that results in having too little cash and other current assets to be able to pay current liabilities as the liabilities mature. A liquidity crunch is a timing issue: not having enough liquidity can force you to make an emergency borrowing at a less than favorable interest rate. (ref)
Now what do all those mumbo jumbo words mean!!!
It’s pretty simple. Liquidity Crunch is the scenario when there is no easy availability of money in the market. Let me exemplify the concept. Suppose you want to sell shares or real estate or vehicle etc. So for this you need buyers which mean you need money from someone to sell your stuffs. But during liquidity crunch, the availability of buyers/money becomes scarce and you get stuck. There could be plethora reasons behind this. Now you might be wondering what exactly is triggering liquidity crunch in Nepal.
The Nepalese financial sector, currently, is witnessing the barrage of IPOs and special offerings of shares. To be more specific, the recent stock offerings from Nepal Telecom and Agriculture Development Bank Limited have created huge excitement amongst the Nepalese investors. The data show that Rs 6000 million has already gone into ADB’s stocks. Furthermore, if you add Rs 4500 million, the minimum amount NTC is going to raise through IPO, the total sum comes out to be mammoth Rs 10.5 billion stuck with only “two” organizations. Now that’s some serious amount of money on hold.
The money will be on hold for at least another two-three months until the shares are allotted. So during this period, if any other IPOs come, it is likely that under subscription situation could be met. Moreover, it can be said that money of depositors will now be moving toward the stock market to purchase the stocks from the upcoming IPOs. As you all know, the largest source of income is interest and if they have such outflow of depositor’s money to stock market, you can say that they are basically in trouble. These signals have already hit the bankers. So these days you might be hearing that the deposit rate as well as loan rate is going to be hiked.
Why do these banks need to hike the interest rate? Well you know it now – it’s for avoiding Liquidity Crunch!!!
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