NRB mulls repo amid tightening liquidity

KATHMANDU, FEB 08 -

Amid tightening liquidity situation in the banking system, the Nepal Rastra Bank ( NRB ) is considering issuing repo (the central bank injecting liquidity by purchasing treasury bills of banks and financial institutions) from the next week.

Until last week, the banking system had excess liquidity, but so far this week, banks do not have more than what is required, according to the central bank. “If the situation continues, we will have to issue repo next week,” said NRB Deputy Governor Maha Prasad Adhikari. “There was excess liquidity of around Rs 10 billion until last week, but the system only has the required amount of liquidity this week.”

If NRB issues repo, it will be the first in one and half years. NRB had last issued repo on Sept 1, 2011. Nepal Bankers’ Associa-tion has also requested the central bank to issue repo to address looming liquidity crunch.

Increased inter-bank lending rate and sales of treasury bills also indicate the tightening liquidity situation. Bankers said inter-bank rate reached almost 5 percent on Thursday—up from around 3 percent on Wednesday.

Rastriya Banijya Bank (RBB) CEO Krishna Prasad Sharma said the demand for inter-bank loans from private banks has increas-ed. He said RBB lent at a maximum of 4.1 percent on Thursday. RBB is one of the banks having the highest excess liquidity. Interest rate on treasury bills has also reached near 3 percent this week. “Although not alarming, the liquidity situation has tightened,” said Anal Bhattarai, CEO of Commerz and Trust Bank.

Bankers said the government’s failure to spend the budget has also affected banks’ liquidity position. Ever since the banks started lowering interest rates on deposits amid excess liquidity, the growth rate of deposits in the system started to plummet. As of first five months of this fiscal

year, deposits in commercial banks, development banks and finance companies increased by Rs 41.39 billion, while lending grew by Rs 83.38 billion.

The Nepali banking system has been facing unstable liquidity situation for the last three years. Fiscal year 2010-11 was the year of liquidity crunch, while the following year saw excess liquidity. And again the situation is tightening this fiscal year.

Bankers said they might have to again consider a hike in interest rate, particularly on deposits, to avert any severe liquidity crunch. “As the interest rate on deposit in Nepal is lower than that in India, there is a risk of capital flight,” said Bhattarai of Commerz and Trust Bank.

 

Source: The Kathmandu Post