NRB's term deposit oversubscribed by almost six times

KATHMANDU:

Liquidity-mopping instrument called ‘term deposit’ launched today by Nepal Rastra Bank (NRB) was oversubscribed by almost six times, indicating banks and financial institutions (BFIs) are still holding excess cash, which have not been converted into loans.

Term deposit of Rs five billion floated by NRB drew bids worth Rs 29.15 billion from various BFIs, an NRB source said.

Despite overwhelming response, the weighted average interest rate on the instrument stood at 0.2072 per cent. This was way lower than the weighted average interest rate of 0.7488 quoted by banks and financial institutions, when a similar instrument was launched in September to mop up Rs 10 billion.

“The weighted average interest rate was lower this time because the number of securities up for grabs was limited,” said the source.

NRB has issued similar instrument thrice in the past, absorbing Rs 20 billion in August and Rs 10 billion each time after that. Term deposit allows commercial banks, development banks and finance companies to park their money at NRB for a period of three months at interest rates fixed through auction.

NRB has been using this instrument to mop up excess liquidity from banking sector fearing excess funds may flow into unproductive sectors like real estate and secondary market, inflating asset prices and subsequently causing prices of other goods and services to go up.

Banks and financial institutions are currently sitting on top of excess liquidity of around Rs 35 billion.

Although the excess liquidity held currently by BFIs is way lower than in August, when they were said to be sitting atop Rs 100 billion of idle funds, NRB is worried about the existing cash pile creating inflationary pressure, which will erode the value of money.

One of the reasons for liquidity surplus in the banking sector is the government’s inability to make use of capital budget.

The government allocated Rs 116.75 billion for capital expenditure this fiscal year, which began in mid-July. But as of November 20, only Rs 6.59 billion, or 5.64 per cent of the allocated amount, was spent.

“Timely use of capital budget would have indicated rise in development works, which would have raised the demand for credit from private sector. This would have automatically solved the problem of excess liquidity,” NRB source said.

But since the government has not been able to make use of budget allocated for capital expenses and revenue is continuously going up, the treasury surplus, according to NRB official, stood at Rs 72 billion as of Friday.

Such a huge saving does not bode well for a country like Nepal, which is facing huge infrastructure gap and it only affects job creation process.

SOurce: THT