No immediate central bank repo in sight

KATHMANDU, FEB 20 -

Nepal Rastra Bank (NRB) is set to wait some more when it comes to issuing repo to comfort banks that are facing stress in liquidity of late. The Nepal Bankers’ Association (NBA) has asked the NRB to take the measure immediately.

Repo is an instrument under which the central bank injects liquidity by purchasing treasury bills of banks and financial institutions (BFIs).

“Members of the open market operation committee led by the deputy governor has reached an understanding that the market itself should be allowed to address the liquidity tightness first, before going for repo,” Baikuntha Aryal, a member of the committee, said. “Our understanding is that the measure to be taken by the NRB should be the last resort.”

The central bank has not issued repo since September 1, 2011.

Aryal said that the market should respond to the problem by hiking the interest rate in deposits and through inter-bank lending. After the liquidity situation tightened, the interest rate of both inter-banking lending and treasury bills has gone up lately.

According to the NRB, the interest rate of inter-banking lending has crossed 6 percent, while the coupon rate (interest rate) of treasury bills has also crossed the 4 percent mark.

“Two banks even took standing liquidity facility (SLF) from the NRB, which is provided at 8 percent interest rate,” an NRB official said. The SLF is a short-term measure to liquidate the bank as it is provided just for a week.

The government’s failure to spend the budget, coupled with higher lending growth compared to the deposit growth, resulted in the tightness in liquidity in the banking system.

According to the NRB, over Rs 45 billion is stuck in the government’s treasury due to its failure to spend development budget.

As of the first half of the current fiscal year, the government has spent a mere 15 percent of the capital budget. The government has this year allocated Rs 51 billion under the capital budget.

On the other hand, the pure credit to deposit ratio has reached 80 percent, while the core capital plus credit to deposit (CCD) ratio has remained at 75 percent, leaving little space for further lending, according to the NRB.

The central bank has sought plans from a few banks (those having less than 20 percent net liquidity ratio) to restore a comfortable liquidity position by monitoring them closely.

The tightness in the liquidity returned after a year’s gap. After an acute liquidity crunch in the fiscal year 2010-11, banks enjoyed excess liquidity in 2011-12. In this context, the finance ministry plans to hold talks with bankers. “We are planning to hold talks with the banks soon,” said Aryal, who is also the joint secretary at the Finance Ministry.

Source: The Kathmandu Post