A tight liquidity situation in the bank ing sector has prompted a number of bank s to obtain standing liquidity facility (SLF) from the central bank for the first time in a year. The SLF is a short-term cash injection by Nepal Rastra Bank (NRB) into bank s and financial institutions (BFIs) facing a short-term liquidity problem or mismatch.
NRB charges 8 percent interest on the SLF which is higher than the interest rate on the inter- bank lending and treasury bills. According to the central bank , the interest rate on inter- bank loans is more than 6 percent while the interest rate on treasury bills is above 4 percent.
“The first to obtain SLF was H&B Development Bank which has been hit hard by fraud committed by its employees,” said an NRB official. “Last week, Nabil Bank and the Bank of Asia also obtained the facility.”
H&B took Rs 1.59 billion under the SLF after it was nearly sunk by staff misconduct. “H&B is still continuing rollover of the SLF but on a smaller scale of Rs 247.9 million after repaying most of the amount,” said the NRB official.
Nabil took a total of Rs 5 billion on two occasions while the Bank of Asia received Rs 3 billion from the central bank , according to the NRB official. Meanwhile, Nabil’s chief executive officer Anil Gyawali said that Nabil didn’t take the SLF from the central bank because it was facing a liquidity tightness. “The money was taken in order to address the temporary mismatch in liquidity after major companies paid their income taxes to the government in mid-December,” he added. “We knocked on NRB’s door after liquidity was unavailable in the inter- bank market on the particular day we received the SLF.”
Although all the bank s are not facing a tightness in liquidity, a few of them are hard up due to sluggish deposit growth and a huge amount of money stuck in the government treasury as it has not been able to spend it, said the central bank .
The government has said that about Rs 45 billion remains unspent in its coffers. The central bank has asked a few bank s with a credit to deposit ratio (core capital plus credit to deposit) of more than 80 percent to submit a plan on how they are going to bring it down.
According to NRB, the credit to deposit ratio as per its directive remains at 75 percent in the bank ing system while the pure credit to deposit ratio stands at 80 percent. The central bank has barred BFIs from crossing the CD ratio of 80 percent.
However, a central bank official said that excess liquidity in the system had improved as of last Friday.
“There was excess liquidity of Rs 8 billion initially which went up to around Rs 12 billion on Friday,” said the central bank official. It is expected that a certain amount of excess liquidity is expected to remain in the bank ing system in order to address any shortfall.
After liquidity was found to be tight in the system, the government had provided Rs 5 billion to Rastriya Banijya Bank from the pension fund in order to ease the shortage.
“Although the government should not give the money meant for pension distribution immediately, we released the amount now to address the recent tightness in the liquidity situation,” said finance secretary Shanta Raj Subedi.
Meanwhile, the Nepal Bankers’ Association (NBA) had asked NRB to issue repo (injection of liquidity by purchasing treasury bills held by BFIs) after liquidity tightened. The central bank , however, does not want to issue repo immediately saying that it would first allow the market to solve the problem on its own.
However, NBA president Rajan Singh Bhandari said that the central bank ’s refusal to entertain the request would result in a rise in the interest rate on both deposit and credit. “Hiking the interest rate on loans is not a pleasant choice, but we will be forced to do so if NRB refuses to issue repo,” he added.
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