Excess liquidity situation: NRB to issue treasury bills, dev bonds

KATHMANDU, NOV 04 -

Amid bankers’ demand that the central bank issue reverse repo to mop up excess liquidity from the market, the Nepal Rastra Bank (NRB) has opted for other options—treasury bills and development bonds.

For the first time this year, the central bank is planning to issue new treasury bills worth Rs 4-5 billion within next two weeks. Currently, the surplus liquidity in the banking system stands at Rs 35 billion.

“We don’t have any plan to issue reverse repo at the moment,” said Gopal Kafle, deputy governor of NRB. “Although raising internal loans through the issuance of treasury bills and bonds is a usual job, we are adopting a fast track approach this year,” said Kafle.

Kafle added that the central bank will also issue development bonds within mid-December. However, it is yet to make public the timeline for issuance of the instrument. The government has announced through the budget that it will raise Rs 37.41 billion internal loans.

According to NRB, deposits in commercial banks went up by Rs 50 billion to reach Rs 723 billion at the end of the first quarter of the current fiscal year, whereas lending rose by only Rs 11 billion to stand at Rs 532 billion.

Due to excess liquidity, there have hardly been any inter-banking transactions in recent days. This is illustrated by the fact that inter-bank lending rate is currently at 1 percent. Rates of treasury bills have also come down to as low as 2-3 percent.

With banks collecting deposits at higher rates and facing difficulties in lending at the same rate or higher, they are complaining that such a situation would hit their profits. With credit demand remaining suppressed, bankers say it is very painful to keep funds collected at higher interest rate idle in the vault. “There is no credit demand in the market as there has been no new investment at all,” said a banker.

With the first quarter already ending, bankers are concerned whether the mismatch between the growth of deposits and lending would hit their profitability. “If this scenario prolongs, our profits will shrink,” said other banker.

However, the central bank is in wait-and-watch mode, as the banking sector faced acute liquidity crunch in the last two years.

NBA president Ashoke Rana said the issuance of treasury bills and bonds will help address the situation, but commercial banks are required to maintain a comfortable liquidity situation to tackle any possible crisis in future.

Source: Kantipur