Lending interest rate to stay high
KATHMANDU, NOV 23:
The lending interest rate might not decline as desired because of the failure of the government to bring a timely fiscal policy which has left the monetary policy impotent.
The government will not issue any internal debt as the partial second budget also could not get the ordinance to raise public debt.
The absence of public debt means no new debt instruments such as treasury bills, development bonds, and citizens’ saving bonds will be issued until the government brings a full-fledged budget.
Internal debt not only bridges fiscal deficit — the gap between government revenue and expenditure — but it is also an important tool used by the monetary policy to influence the interest rate in the financial market.
“The lending interest rate will not be declining any time soon as the absence of government bonds means the drying up of a major avenue of investment for banks when demand for new loans is already low,” said vice president of Nepal Bankers’ Association (NBA) Upendra Poudel.
Long-term government securities such as development bonds offer nine to 10 per cent interest rates and are mopped up by banks immediately.
Increased liquidity but lack of proper projects to finance have pushed up the banks’ cost of fund and they are not able to pull down the lending interest rate while deposit rate has gone down significantly.
Moreover, bonds are an important part of a commercial bank’s Statutory Liquidity Ratio (SLR). “Banks are already struggling to maintain 15 per cent SLR. And if the government is late in issuing bonds, banks will be in difficulty,” pointed out Poudel, who is also chief executive of NMB Bank.
Treasury bills and bonds are used by Nepal Rastra Bank (NRB) to guide the interest rate through Open Market Operations (OMO). In case of excess money supply like at present, the central bank absorbs the liquidity by buying government securities from banks, and in case of a tight liquidity situation, the central bank releases securities by selling them to banks. Without effective monetary instruments, draining the surplus liquidity can be a difficult task for the central bank.
The Open Market Operations is the most effective monetary tool in the central bank’s arsenal as it controls both short-term interest rate and supply of base money in the economy, thus directly impacting rate of inflation as well.
The central bank’s inability to mop up liquidity will also limit its capacity to control demand side inflation. “Nepal Rastra Bank will roll over treasury bills that have reached maturity for the Open Market Operations.
Since no fresh treasury bills will be issued, the central bank’s ability to absorb liquidity will be limited,” said a high official at the central bank. This will again impact the interest rate as banks will have a high amount of idle cash at hand.
Last fiscal year, Nepal Rastra Bank had issued treasury bills worth Rs 16 billion, development bonds worth Rs 16 billion, national savings bond worth Rs 5 billion, citizen’s saving bond worth Rs 1.4 billion and foreign employment bond worth Rs one billion, for the government.
Source: THT
