Kathmandu, January 26

Owing to the liquidity crisis that could adversely affect the economy as many banks have halted loan disbursement, Nepal Bankers’ Association (NBA) — the umbrella body of class ‘A’ financial institutions in the country — has sought refinancing facility worth Rs 100 billion till the end of this fiscal from Nepal Rastra Bank (NRB).

Due to the government’s inability to increase capital expenditure, deposit growth has been sluggish as compared to credit expansion, which has resulted in severe liquidity crisis. The government’s development expenditure has been rather slow since last fiscal. In the previous fiscal, the government was able to spend only 60 per cent of the allocated amount worth Rs 208.88 billion. In the first half of this fiscal too only 11.3 per cent of the total allocation of Rs 311.95 billion has been spent, as per Financial Comptroller General Office.

As the government has failed to ramp up development expenditure, its treasury surplus has swelled to a whopping Rs 203.96 billion, according to Nepal Rastra Bank (NRB).

“Since a large chunk of the government’s fund has remained unspent, the refinancing facility to banks till the end of this fiscal can help ease the situation,” said Bhuvan Kumar Dahal, CEO of Sanima Bank.

However, NRB needs to take permission from the government — Ministry of Finance (MoF) — to provide refinancing facility to banks. At present, NRB provides funds to banks at four per cent interest rate and allows banks to lend the funds at up to nine per cent interest rate.

Bankers have stressed that the government needs to address the situation as early as possible because the banks are going through acute liquidity crisis. Banks have been increasing lending rates citing the high cost involved in attracting deposits and some banks are already offering up to 12 per cent annual interest rate on fixed deposits.

“A rise in lending rates will gradually increase the cost of production of goods manufactured in the country, and services and import of goods will also become dearer,” warned Keshav Acharya, an economist. “Deposit rates will come down only after the government’s expenditure gains momentum.”

As per bankers, refinancing facility could be a remedy for banks till the government’s expenditure gathers pace. The central bank can make the banks liable to lend only to the productive sector under the refinancing facility, they added.

Bankers have also requested the MoF to release the fund allocated for distribution of second tranche of housing reconstruction grant to the banks. In a meeting with Deputy Prime Minister and Finance Minister Krishna Bahadur Mahara, a delegation of bankers requested him to release the fund allocated for the distribution of second tranche of the government aid for reconstruction of earthquake ravaged individual houses.

“If the money is released to the banks promptly, it will ease the current liquidity crisis as the money will circulate in the banking system until the beneficiary households receive the instalment from the banks,” explained Dahal.

The National Reconstruction Authority today urged Ministry of Federal Affairs and Local Development (MoFALD) to release around Rs 12 billion to Central Level Project Implementation Unit for distribution of second instalment of the housing grant. However, the fund can be released to the banks only after the District Development Committee forwards the approved files to the District Treasury Controller Office.

Agreement to keep deposit interest rate at 12 per cent

KATHMANDU: Management heads of the 28 commercial banks of the country today agreed not to raise the interest rate on fixed deposits to more than 12 per cent, which is already being offered by some commercial banks, according to one official privy to the matter. Bankers agreed on this issue as around Rs 55 billion that was collected when applications were filed for the Further Public Offering of Nepal Life Insurance Company will return to the banking system after the allotment of shares within a few days and the liquidity crisis will slightly ease then. Banks had recently started offering 12 per cent annual interest rate to individual savers and 13 per cent to institutional depositors. As Nepal Rastra Bank has put a cap on institutional deposits — only 50 per cent of the total deposit — some banks have been raising interest rates on fixed deposits to attract individual depositors. The high interest rates offered by some banks have begun pressurising other banks, who were in a comfortable position, to raise their interest rates on savings as well to retain depositors.

As most banks, except government-owned Rastriya Banijya Bank and Nepal Bank Ltd, have been maintaining CCD (credit to core capital cum deposit) ratio at the upper limit (80 per cent) they could face problems if deposits are withdrawn in huge amounts.

Repo undersubscribed

KATHMANDU: In a bid to ease the severe liquidity crunch being faced by the banking sector, the central bank had issued repo auction of Rs 20 billion on Thursday, but the instrument was undersubscribed. Altogether, 15 participants bid for Rs 19.65 billion during the repo auction, with the banks eligible to borrow Rs 17.81 billion from the central bank. A total of 74 bids were received for the seven-day instrument with highest interest rate of 7.5 per cent and  the lowest rate of 4.09 per cent. The weighted average rate was 5.68 per cent.