Excess liquidity in banks drops to Rs 2b

- POST REPORT, Kathmandu
Excess liquidity in banks drops to Rs 2b

Feb 4, 2015-

The banking system seems to have recovered from a situation of excess liquidity lasting two years with extra cash coming down to Rs 2 billion.

According to Nepal Rastra Bank (NRB), the amount of surplus liquidity in the banking system has dropped drastically thanks to a surge in bank loans and intervention by the central bank through reverse repo and deposit collection instruments.

According to NRB, a tightened liquidity situation has affected interest rates as well. The coupon rate (interest rate) on 91-day treasury bills has increased to 0.8 percent from a low of 0.02 percent.

Bankers said that liquidity had been tightened lately due to a massive growth in lending. Nepal Bankers’ Association (NBA) President Upendra Poudyal said deposits grew 6.4 percent in the last six months, while lending rose by more than 14 percent, resulting in a decline in excess liquidity in the system. Deposits in commercial banks decreased to Rs 1281 billion on January 23 from Rs 1,282 billion on December 26, 2014.

On the other hand, lending grew to Rs 1,028 billion from Rs 999 billion, according to NBA.

The central bank absorbed around Rs 50 billion trough deposit collection instrument, and an additional Rs 35 billion went out of the banking system for the payment of advanced tax to the government, according to Poudyal.

Given this context, the bankers say the return of excess liquidity is still possible if lending does not grow.

Ashoke Rana, chief executive officer of Himalayan Bank said, “Comparing just the credit-to-deposit ratio, leaving aside the core capital, a majority of banks have exceeded the 80 percent criteria,” said. “Our credit-to-deposit ratio has also reached a historic high of 77 percent due to a surge in lending.” According to Rana, the downward spiral of interest rates on lending stopped a month ago. “Some banks were offering loans for as low as 6.5 percent interest until last month.

The interest rate on term loans has now stabilized at 7 percent,” said Rana. Term loans are short-term loans provided usually for imports which mature in three months and feature the lowest interest rates.

Improving liquidity situation in the banking system can also be gauged from the fact that the average interest rate of the reverse repo is currently at 0.17 percent, which one had reached to as low as 0.0002 percent.

Also, the central bank is conducting reverse repo worth Rs 1 billion now. The figure once had touched Rs 19.5 billion, when the excess liquidity in the banking system had reached more than Rs 80 billion.

Published: 05-02-2015 09:33

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