Central bank demands plan from vulnerable banks

KATHMANDU, FEB 17 -

With tightening liquidity in the banking system, the Nepal Rastra Bank (NRB) has sought plans from a few banks (those having less than 20 percent net liquidity ratio) to restore a comfortable liquidity position.

An NRB source said the central bank has demanded such plans from ‘two-three’ commercial banks, while keeping them under close monitoring.

The tightness in liquidity has returned in the banking system after a year’s gap. After an acute liquidity crunch in fiscal year 2010-11, banks enjoyed excess liquidity in 2011-12.

Both the central bank and bankers attributed the tightening liquidity situation to the government’s failure to spend development budget.

According to NRB, development budget worth about Rs 50 billion has remained idle in the government’s coffer. “The government collected advance tax in mid-July, but failed to spend, leading to the tightness in liquidity,” said Ashoke Rana, chief executive officer of Himalayan Bank Limited (HBL).

According to the Finance Ministry, development expenditure, in the first half of the fiscal year, stood at a meagre 15 percent. Another factor responsible for the situation is higher rate of lending growth compared to deposit growth. In the first half, a majority of the banks witnessed higher growth in lending compared to deposits, which increased their credit-to-deposit (CD) ratio.

According to NRB, the average core capital and credit-to-deposit (CCD) ratio has remained at 75 percent, while the pure domestic credit-to-deposit (CD) ratio has been at 80 percent.

The central bank has made it mandatory for banks to maintain CCD ratio below 80 percent. This means the banks still have some space for lending. Only a few have the CCD ratio above 80 percent. Most of the commercial banks saw their CCD ratio increase in the first six months of this fiscal year.

Banks are currently adjusting their liquidity positions through inter-bank lending. Bankers say the inter-bank lending rate is currently hovering around four percent. “Banks facing liquidity crunch have, in some instances, paid more than five percent in call deposits put in by development banks and finance companies,” said Rana.

The Nepal Bankers’ Association has requested NRB to issue repo (central bank injecting liquidity by purchasing treasury bills owned by banks). And, NRB has said it will do so only if the current situation does not improve. The interest rate (coupon rate) on treasury bills has also gone above 2 percent in recent days, according to NRB.

An NRB official, however, said now all banks are facing liquidity crunch, but a few. “That’s why the demand for standing liquidity facility (short-term liquidity injection by NRB) has been low,” he said.

Source: The Kathmandu Post