KATHMANDU, FEB 03 - The liquidity crisis in the banking sector may ease in the coming days with remittance increasing by 15.03 percent in the first six months of this fiscal year and Nepal Rastra Bank (NRB) taking stringent measures to discourage lending to real estate and gold imports.

According to the central bank, remittance grew to Rs. 100.73 billion in the first six months this year from Rs. 87.56 billion during the same period last year. Remittance had grown by just 6.6 percent during the first four months of this year against 65.9 percent during the same period last year.

A slowed remittance growth, soaring gold imports and excessive lending especially in real estate and gold have been cited as the major factors behind the balance of payments deficit of Rs. 20.49 billion. The foreign exchange reserve has also dropped to Rs. 196 billion from Rs. 221 billion depicting symptoms of a crisis in the economy. These factors resulted in the cash crunch in the banking sector.

However, the central bank is upbeat about some indicators that show some improvement in the liquidity situation.

The repo rate (the rate of interest banks pay to NRB to get funds) has come down to below 10 percent by the end of January against around 13 percent in the first week of January. The discount rate (the interest rate that NRB pays to banks to get funds from them against treasury bills) has also come down lately.

The interest rate on inter-bank lending has also fallen to around 10 percent as of the end of January from around 14 percent in the first week of January. "These evidences show that the liquidity crisis is slowly improving," said NRB executive director Maha Prasad Adhikari.

In order to address the cash crunch, the central bank has already pumped around Rs. 20 billion into the banking system through repo and outright purchase over the last three months.

However, president of the Nepal Bankers Association Sashin Joshi said that the crisis was not over and expressed disappointment over NRB's decision not to inject the promised amount of liquidity. Lately, the central bank had injected just Rs. 5 billion citing a low repo rate on the part of banks although it promised to pump Rs. 10 billion to ease the crisis.

Bankers said that some banks, despite facing an acute liquidity crisis, could not get enough funds from NRB as they didn't have enough treasury bills to sell to the central bank.   Banks with a good liquidity status didn't opt to get NRB funds by paying a high repo rate while other banks continued to suffer from the crisis. "I urge NRB to inject adequate liquidity," Joshi said. According to his assessment, the crisis in the banking system will last for the next three months.

Banks and financial institutions have increased the interest rate on lending saying that their cost of funds had gone up as they were paying a higher interest rate. The business community has complained that it would make them less competitive as they would be forced to increase the price of their goods.

However, Finance Secretary Rameshwor Khanal does not see any reason for banks to increase the interest rate on lending although the cost of funds has gone up due to the liquidity crisis.

"The cost of funds for the banking sector has gone up by just 1-1.46 percent as a result of the liquidity crisis," said Khanal. "This should not be an excuse to increase the interest rate on lending heavily as this crisis is temporary and will be over within one or two months."

Major Economic Indicators

                                      in six months

Remittance growth    15.03%

Deposit growth    7.90%

Credit growth    19.23%

Gold imports    Rs. 33 billion

in  four months

Imports growth    27.8%

Exports growth    -23.7%

BoP deficit    Rs. 20.49 billion

Posted on: 2010-02-03 03:17

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