• Central bank mistrustful of bankers
• NBA says NRB shouldn’t be suspicious

Kathmandu, August 11

The money market instrument floated to ensure smooth operation of the interest rate corridor (IRC) remained undersubscribed today as well, prompting Nepal Rastra Bank (NRB), the central monetary authority, to become suspicious about activities of banks and financial institutions (BFIs).

Today, two-week term deposit instrument worth Rs 15 billion was offered to BFIs to mop up excess liquidity from the banking sector. But the response was lukewarm, with subscription standing at Rs 350 million. This means only 2.3 per cent of the instruments up for grabs were subscribed today.

Yesterday too, NRB had floated two-week term deposit worth Rs 20 billion. This was the first offer made by NRB to bring IRC into operation. But tools worth only Rs 16.10 billion were subscribed.

This lukewarm response, according to an NRB official, indicates ‘bankers are hesitating to cooperate to institutionalise the IRC’.

“We had introduced the IRC to reduce interest rate volatility, which was also one of the demands of some of the bankers. But following its introduction, BFIs are hesitating to take part in market operations, while funds are sitting idle in coffers,” said the official on condition of anonymity. The banking sector currently has excess liquidity of Rs 11.20 billion.

NRB had finally introduced IRC yesterday to keep interest rates within a band by mopping up or injecting liquidity into the banking sector whenever necessary.

This mechanism of keeping a stern eye on liquidity situation, the central bank hoped, would gradually prevent interest rates from suddenly hitting rock bottom or going through the roof.

This, NRB believed, would ultimately lift deposit rates, benefiting depositors who complain about losing money by parking savings in banks due to negative real interest rate, and stabilise lending rates, giving some respite to borrowers, who gripe about sudden hikes.

“But considering the response of the last two days, it will take us some time to make BFIs understand why proper functioning of IRC is necessary for the financial sector,” the NRB official said, adding, “Bankers had shown similar attitude when open market operation was first launched in the country several years ago.”

Bankers, on the other hand, have asked NRB not to harbour suspicion.

“The initiative taken by NRB to introduce IRC is a positive step. However, it will take some time for officials working in treasury departments of different BFIs to get used to this. We believe things will stabilise in a week or so,” Anil Shah, CEO of Mega Bank and vice president of Nepal Bankers’ Association (NBA), told The Himalayan Times.

Yesterday, Min Bahadur Shrestha, executive director at NRB’s Public Debt Management Department, had acknowledged that one of the reasons for unenthusiastic response could be short notice extended to BFIs to take part in the operation.

While auctioning similar instruments in the past, NRB used to issue the notice one week in advance. This used to give ample time to BFIs to take part in the auction. But notices related to open market operations under the IRC are being extended only a day in advance, which provide very little time to BFIs to make necessary preparations.

Another reason for lukewarm response could also be low interest rates, which may have prompted BFIs with moderate level of excess liquidity to ignore the open market operation. Yesterday, interest rate on two-week term deposit was fixed at 0.3045 per cent. Today’s rate stood at 0.2487 per cent.