Gopal Tiwari

Kathmandu, March 2:

Liquidity of commercial banks, deposited with Nepal Rastra Bank (NRB), has gone down by more than 50 per cent of late.

According to a source in the central bank, NRB has only about Rs 11 billion in liquidity from commercial banks at present, which was Rs 24 billion six months ago.

“The fall in liquidity has not helped increase business and economic activities or to build business confidence,” people from the business sector complained.

NRB sources said the fall in ‘liquidity’ is attributed to central bank’s action, mopping up liquidity of commercial banks, as per open market operations.

“NRB did suck in liquidity from the banks as they were having excess liquidity, well above the Cash Reserve Requirements (CRR),” said central bank officials.

Sucking in liquidity is to prevent commercial banks from lowering their interest rates on deposit and benefit ‘depositors’. It would also help maintain interest rates and prevent ‘capital flight’. “Interest rates on securities, bonds also went up, following tightening of excess liquidity that stands at three per cent,” said the bank source.Earlier, when there was excess liquidity, commercial banks had one per cent interest in short-term treasury bills, securities and bonds. NRB also said that credit from the banks to the private sector has also gone up by 17 per cent, especially in the ‘consumer segment’.

Narendra Bhattarai, immediate past president of Nepal Bankers’ Association (NBA), said, “Investment, following a decline in liquidity in NRB, had been diverted to treasury bills, bonds and securities. These market instruments are safe for us,” Bhattarai commented.

However, he said that there is no demand of loans in the market these days, thanks to a ‘clumsy’ environment, said Bhattarai.

“If we invest on market instruments, instead of keeping liquidity with NRB, it benefits us,” he said. “Interest rates will also improve through liquidity sucking”.

President of Nepal Chamber of Commerce (NCC), Rajesh Kaji Shrestha rubbished the claim by bankers that 17 per cent of the credit flow from banks have gone to the private sector in 2003-04. In the past, two largest commercial banks namely Nepal Bank Ltd (NBL) and Rastriya Banijya Bank (RBB) used to hold large amounts of excess cash reserves. But the new foreign management responsible to reform the bank, has managed the reserves well. As a result of which, the overall cash reserves have come down.

NRB had taken the initiative to cut down on excess liquidity following its offloading of government securities from its portfolio.

Man Bahadur Shrestha, a small borrower and a resident of Dillibazar Kathmandu, expressed ire against the banks saying they have totally failed to serve the interest of small investors. “If the banks provide loans for operating micro-enterprises, it would be safe for banks as well as expedite the industrialisation process,” said Shrestha.

NRB has soaked up Rs 13.60 billion in the past six months from banks. “Instead of increasing consumer loans, banks should focus on enhancing productivity, employment and industrialisation through diversified lending,” said Shrestha, president of NCC.

However, central bank officials also commented that consumer loans do not enhance the production capacity of the economy. Since we do not produce consumer goods, it has implications on Balance of Payments (BoP).

Under the Standing Liquidity Facility (SLF), earlier commercial banks were allowed to avail liquidity from NRB up to 90 per cent, which has now been whittled down to 50 per cent only. The move will help maintain BoP, opined central bank officials.