Liquidity surplus rises as lending comes to a halt due to Tarai turmoil

Data of Public Debt Management Department of NRB shows the central bank mopped up a total of Rs 476.8 billion from the banking industry in the last fiscal year 2014/15. Out of the total fund, the central bank had Rs 71 billion of outstanding fund in its vault as at mid-July 2015 -- the end date of the last fiscal year 2014/15. However, the central bank's effort to overcome excess liquidity through open market operation has failed to address the problem as bank and financial institutions (BFIs) are unable to step up their loans and advances in line with their deposit volume. Bankers, however, say slowdown in the volume of their loans and advances has further deteriorated in recent weeks due to low demand for loans amid volatile political situation and recent devastation caused by the earthquake. "Current political crisis has deepened and Tarai turmoil is worsening. It has seriously hit the banks' loans and advances. The surplus of fund is obvious as there are no borrowers at all," Ashok Sherchan, CEO of Prabhu Bank Ltd, said. Steep rise in liquidity surplus is also attributed to the central bank's approach of slowing the pace of mopping up funds. NRB, which used to issue deposit collection frequently earlier, has stopped issuing this monetary operation since August 13 while outright sale auction has not been held since August 27. The central bank, however, is using the reverse repo instrument on a regular basis. The latest was issued on Wednesday to collect Rs 10 billion. Min Bahadur Shrestha, executive director of Public Debt Management Department of NRB, told Republica that they have withhold the deposit auction briefly as liquidity situation in the market was tightening. "We slowed the pace of mopping up liquidity briefly, as the problem of excess liquidity surplus was improving," said Shrestha. "We have been issuing instruments after making assessment of the market." Statistics of NRB's Public Debt Management said the central bank has mopped a total of Rs 119.25 billion from the banking system in the last two years to ease liquidity strain. The central bank absorbed Rs 59 billion through reverse repo, Rs 57.25 billion from deposit auction and Rs 13 billion from outright sale auction in the first three months of the current fiscal year 2015/16. However, the outstanding fund at the central bank stands at Rs 74.35 billion as of Wednesday as some funds absorbed through the liquidity absorbing instruments go back to BFIs with the end of the maturity period. The maturity period of reverse repo and deposit auction is seven days and 90 days, respectively. Similarly, the maturity of outright sale is based on the maturity of securities that the central bank sells to BFIs. With liquidity becoming relatively tighter, the weightage average interest rate on such instruments was increasing on the last auctions as BFIs with relatively low idle funds started quoting higher rates. For example, the weightage interest rates on the last deposit collection held on August 13 stood at 2.97 percent, up from interest rate of 0.7107 percent on the deposit auction held on July 23. Shrestha also said withdrawal of deposits by public on the eve of Dashain festival will also help to ease liquidity strain. "Many depositors withdraw money during this period while money that we have circulated goes to the hands of the people from the banking system which will reduce the excessive fund in the banking system for the time-being," he added. While issuance of loans and advances by BFIs has come to a halt in recent weeks, deposit mobilization continues to increase largely due to the inflow of the remittances. According to Nepal Bankers' Association, 30 commercial banks have mobilized deposits of Rs 1,483 billion and disbursed Rs 1,112 billion on loans as at October 2. "Nepalis living abroad, mainly those who have gone for foreign employment, are sending money back to their families to celebrate festival. Also they are sending money to their families to rebuild homes destroyed by the quake. This has helped swell deposits in BFIs," Trilochan Pangeni, spokesperson of NRB, told Republica.