Interbank rates on rise as liquidity situation becoming normal

ShareSansar, October 9:

As the banks and financial institutions (BIFs) are getting rid of the excessive liquidity, the interbank lending rates are also in the rise in recent days.

Thanks to some slowdown in the remittance inflow, rise in the withdrawal of the deposit by the public on the eve of Dashain festival and the deposit collection by the central regulatory bank, the liquidity surplus has come down to the ‘normal’ level now.

The interbank lending rate has for the first time crossed the 1 percent mark in past 18 months on September 26. The rate remained below 1 percent throughout FY 2013/14.

The interbank interest rate was 1.1527 percent earlier on May 24 last year. However, the rate was on the downward trend since as the banks and financial system were flushed with excessive liquidity. The rate stood at 1.4425 percent on September 30.
 
“The central regulatory bank has already absorbed the excessive liquidity through the deposit auction instrument which has helped to manage the excessive liquidity surplus in the banking system. The rise in the interest rate of the interbank lending could be the reflection of the normal liquidity situation,” said Manmohan Kumar Shrestha, spokesperson of Nepal Rastra Bank (NRB).

The central regulatory bank has already soaked up Rs 40 arba from the banking system through newly introduced instrument called ‘deposit auction’ whereby NRB collects deposit directly from the BFIs for 90-day period. The interest rate of the deposits is fixed through the auction.

According to NRB spokesperson Shrestha, the current liquidity in the banking system hovers around Rs 11 arba.

The slowdown in the flow of the remittance in the first month of the current fiscal year could also be one of the reasons behind a dive in the liquidity, according to a banker.

According to a report of NRB, remittance inflow in the country increased marginally by 0.8 percent in Bhadra against the comparison of the 23.8 percent surge in the corresponding period of the last fiscal year 2070/71. During the review period, the migrant workers sent a total of Rs 42.19 arba as remittance.

Similarly, public deposit also gets withdrawn on the eve of the festival seasons like Dashain and Tihar.

With the liquidity situation becoming normal, BFIs are now also in pressure to adjust the interest rates of the deposit and loans. Speaking at a recent program, NRB Governor Dr Yuba Raj Khatiwada has called on the BFIs to be prudent now while adjusting the interest rates.

“What you used to call the excessive liquidity has come to the level of easiness now. Do not take the situation of liquidity easiness for granted. If you continue to trim interest rates, particularly the interest rate on deposits, assuming that people are bound to come to you to park their money, situation may come when you will have to make another announcement on doubling interest rate,” Dr Khatiwada warned.