E-Kantipur

KATHMANDU, AUG 21 -

With the banking sector witnessing a marked improvement in liquidity situation, bankers are showing little interest in taking liquidity from the Nepal Rastra Bank (NRB).

No bank and financial institution (BFI) applied for repo (central bank providing financing against treasury bills of BFIs) in three out of four weeks during mid-July to mid-August, according to NRB. “No BFIs applied for repo in the first two weeks and the last week, while a handful of banks applied in the third week,” said a senior central bank official. NRB has already reduced the frequency of repo issuance from twice a week to once.

Given the abundance of liquidity in banks, they are not applying for repo. According to NRB, the banking market has a surplus liquidity of Rs 24 billion as of Thursday. “Technically, it is the time to discontinue repo issuance with BFIs not interested in this instrument,” said NRB Deputy Governor Maha Prasad Adhikari. “However, we are continuing to issue repo so that some BFIs facing liquidity problem could get liquidity through this window.”

Due to increased government spending, transfer of deposits from B and C class financial institutions and other factors, commercial banks have witnessed a surge Rs 10 billion in their deposits during mid-July to mid-August. Deposits of commercial banks surged to Rs 683 billion in mid-August from Rs 673 billion in mid-July, while lending remained almost stagnant with a growth of Rs 2 billion to Rs 523 billion. The gap between deposit and lending resulted in surplus liquidity.

The central bank is also giving liquidity (in Nepali currency) to banks by mopping up foreign exchange thrice a week. “The central bank is giving domestic currency of around Rs 2 billion to banks every week against foreign exchange,” said the NRB official. “This has also helped increase liquidity in the banking sector. Factors such as lack of other investment areas also contributed to rise in bank deposits in banks.”

With the surge in liquidity, Nabil Bank and Standard Chartered Bank subscribed government treasury bills worth Rs 6 billion having a maturity period of 364 days a few days ago. “Due to comfortable liquidity situation in recent days, we subscribed the long-term treasury bills,” Nabil’s general manager Amrit Charan Shrestha said.

However, the central bank has not hastened to issue reverse repo (central bank mopping up liquidity from BFIs). It has been almost a year since the NRB has not issued reverse repo. “We are not thinking about issuing reverse repo immediately as Dashain, when people withdraw large amounts of cash, is around the corner,” said Adhikari. Also, there are concerns that whether mopping up liquidity from banks would be a right approach given the current surge in deposits could be temporary. “I don’t think it is the right time to mop up liquidity from banks as the current situation is temporary,” said Nabil’s Shrestha.

There are also concerns that banks could reduce interest rate on deposits in the absence of other investment areas which would make Nepali interest rate cheaper than that of India leading to capital flight. A recent delegation of the International Monetary Fund that assessed Nepal’s economic and financial situation suggested keeping interest rate on deposits not below India’s rate.

Posted on: 2011-08-21 10:07

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