NRB's repo witnesses lukewarm response

Kathmandu, January 8

The banks and financial institutions (BFIs) have been claiming that they have been facing acute liquidity crisis since the last few months due to sluggish deposit growth despite the double-digit interest rate being offered on fixed deposit accounts. However, the BFIs have not bid for the repo that the central bank has issued as expected.

A very few BFIs submitted bids for borrowing from Nepal Rastra Bank's funds (repo), which amounted to just Rs 3.49 billion. Due to the liquidity crisis in the banking system, the central bank today issued repo worth Rs 10 billion, but only about one-third of the issued amount was subscribed. NRB had offered repo at 4.8701 per cent interest.

The rate offered by NRB for the two-week repo was far lower than the interest rate being offered on deposits by the BFIs.

Trilochan Pangeni, head of the Public Debt Management Department of NRB, said that the lukewarm response from BFIs to borrow funds from the central bank shows that there is no liquidity crisis as claimed by them. BFIs have been raising interest rate on fixed deposits and on lending simultaneously since the beginning of the second quarter of this fiscal citing fund crunch for lending but the repo issued by the central bank has been undersubscribed.

However, bankers have said that there is lukewarm response from BFIs to borrow from the central bank because the interest rate quoted by the central bank is higher than the interbank rate. "The funds borrowed from the central bank cannot be lent and can be used only for maintaining credit to deposit (CD) ratio," said Anil Keshary Shah, president of Nepal Bankers' Association, the umbrella body of class 'A' financial institutions of the country.

"If we collect deposits worth Rs 100 from the public we can lend up to Rs 80 after allocating six rupees as liquid cash and Rs 14 for government securities, but the repo issued by the central bank can only be used to maintain CD ratio," said Shah.

BFIs borrow funds from NRB only if the central bank quotes an interest rate that is lower than the interbank rate.

It is reported that only a few banks are under pressure to maintain CD ratio as per the central bank requirement. BFIs are allowed to lend only 80 per cent of the deposit collection.

On the other hand, commercial banks need to maintain 12 per cent of their total deposit as liquid cash. Likewise, such rate for the development banks and the finance companies has been set at nine per cent and eight per cent, respectively.