KATHMANDU: Bankers have asked Nepal Rastra Bank (NRB) to create a permanent mechanism to deal with excess liquidity as the problem which has been plaguing the banking sector intermittently for three years has resurfaced.
A situation of extra cash usually occurs when there are not enough lending opportunities. Nepal’s banking system has been awash in cash from the fiscal year 2012-13.
The Nepal Bankers’ Association (NBA) has inserted a request for more investment opportunities in debt instruments among the recommendations it has submitted to the central bank. The NBA customarily presents a set of recommendation before the monetary policy is published.
According to NRB, banks and financial institutions ( BFIs ) have excess liquidity in the amount of around Rs100 billion. A sharp decrease in demand for loans after the April 25 earthquake amid a surge in deposits also contributed to the massive excess liquidity in the system. As per the latest records from the NBA, commercial banks have collected about Rs87 billion in deposits while lending has reached just Rs6 billion since the disaster.
“It has been so many years that we have been witnessing excess liquidity , but there are not enough debt instruments where we can invest at a time when demand for loans has fallen” said Bhuvan Dahal, chief executive officer of Sanima Bank. As economic activities slowed after the earthquake, loan demand from the private sector went down, according to bankers.
As the government has not been raising internal loans as planned for the last two years, banks have few debt instruments available to them. The central bank has continued conducting reverse repos to absorb liquidity , but it has not yet issued deposit collection instruments which have a longer maturity period since mid-April. The current monetary policy has mentioned issuing NRB bonds if needed, but it has not happened.
Due to excess liquidity , banks have been rushing to compete for limited government bonds and treasury bills which have a lower interest rate and a longer maturity period in contrast to the usual system which dictates that the longer the maturity period, the higher the yield.
Returns on 15-year development bonds floated by the central bank on Thursday dropped to 2.65 percent compared to 4 percent on five-year bonds floated a month ago. “The current trend of the development bond rate is a serious distortion and gives a blurred picture of the interest rate regime for the future and can create bubbles in various pockets of the economy with massive inflationary pressure,” said Sovan Dev Pant, CEO of Lumbini Bank.
Besides suggesting measures to curb excess liquidity , the apex body of the CEOs of commercial banks also asked the central bank to consider decreasing the portion of deprived sector lending for commercial banks.
Currently, they have to invest 4.5 percent of their total lending in the deprived sector.
