Liquidity crunch worsens
- Inter-bank rate reaches 12pc
The inter-bank rate has risen to more than 12 percent in a reflection of the liquidity crunch becoming worse. The inter-bank rate is the rate of interest charged on loans made between banks and is an indicator of the prevalence of liquidity in the banking sector. The liquidity crunch has heightened despite a recent surge in deposits. This might be due to slow recovery of loans, according a senior Nepal Rastra Bank (NRB) official.
According to NRB, deposits in commercial banks surged to Rs 649 billion as of mid-April from around Rs 635 billion in mid-March. There is a tendency for deposits to increase in the last quarter of the fiscal year due to increased government spending. Money from the government reaches contractors and they use it to repay their loans or deposit it in banks contributing to greater liquidity.
“Deposits are not growing constantly as liquidity crunch is sometime intense and sometime low,” said Suman Joshi, chief executive officer of Laxmi Bank.
However, the government has been unable to spend the money allocated in the budget and the treasury has swollen to Rs 17 billion as of third quarter of the fiscal year from Rs 12 billion in mid-February, according to the central bank. “Poor government spending is one of the reasons behind continuous liquidity crunch,” said Sashin Joshi, former president of Nepal Bankers’ Association, adding that the liquidity crunch was continuing as money continued to remain in informal sector.
The continuous injection of liquidity by NRB through repo (under which the central bank provides cash to banks by purchasing their treasury bills) over the last two months also suggests a continuing liquidity crunch in the banking system. The central bank has already injected Rs 39 billion over the last two months and there is still Rs 15 billion worth of repo in the market.
However, Joshi of Laxmi Bank criticised NRB for not issuing repo last week despite liquidity demand from banks. The central bank issued repo worth Rs 5 billion on Wednesday after 10 days from April 10.
Bankers said they were compelled to slow credit due to the continuing liquidity crunch. “We are going through a credit crunch,” said Joshi, CEO of the NIC Bank.
Despite the liquidity crisis, banks increased their loans by Rs 60 billion in nine months compared to Rs 36 billion in deposits, according to NRB. This has resulted in increased credit and deposit ratio limiting liquidity prevalence in the banking system.
Posted on: 2011-04-22 09:48
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