Nepal Rastra Bank (NRB) – the central regulatory and monetaryauthority – today called for a repo auction worth Rs two billion, with atwo-week maturity period, in a bid to mop up excess liquidity from the bankingsector.

Banks have quoted five per cent interest rate, which is around twopercentage points higher than the prevailing interbank borrowing rate. Thefinancial instrument that has two-week maturity period has been issued tocorrect the interest rate, which plunged below three per cent yesterday.

The three per cent interest rate is lower bound, or floor, of theinterest rate corridor for short-term instruments, like, interbank borrowing,treasury bills, among others.

The Monetary Policy 2017-18 has envisioned to keep the short-terminterest rate in between three per cent and seven per cent for the stability ofinterest rates. Three per cent is lower bound and seven per cent is the upperbound of the interest rate corridor. The central bank mops up liquidity whenthe interest rate drops below three per cent and injects liquidity when theinterest rate increases above five per cent, to keep the interest rate stable.

Narayan Prasad Paudel, executive director and spokesperson forNRB, said that excess liquidity in the market resulted in the interest ratedropping below the lower bound of the corridor. “Central bank has mopped upliquidity to keep the interest rate stable,” he said, adding, “Following thecentral bank’s intervention, the interbank borrowing rate stood at 3.0377 percent today.”

The central bank has said that excess liquidity caused interestrate to drop in interbank borrowing.

Central bank has started implementing interest rate corridor inshort-term interest rates and plans to gradually enforce it for long-terminterest rates like in deposits and lending. “Once the short-term interest ratestabilises, we can expect the interest rate corridor to work on long-terminterest rates like lending and deposits,” said Paudel.

However, the bankers have said that the market is not facingliquidity crunch and the BFIs are actually facing crisis of loanable funds.“Central bank is trying to keep its arguments up citing the liquidity scenario;however, the problem is being intensified as there is lack of fresh depositsources,” one of the bankers told The Himalayan Times.

Banks can lend up to 80 per cent of the sum of their core capitaland total deposits. From the remaining 20 per cent, they have to maintain sixper cent as cash reserve ratio (CRR), around four to five per cent liquid cashin their vault and remaining 10 to 11 per cent can be invested in governmentsecurities.

“Banks are not facing pressure to maintain CRR, they are facingshortage of funds to lend as their lending capacity has already been saturatedand majority of the banks have extended loans up to the permissible credit tocore capital cum deposit (CCD) ratio,” said the banker, requesting anonymity.

There is slackness in potential source of deposits, as perbankers. “The government expenditure is slow, remittance growth is negative, sofrom where would the banks draw in fresh deposits?” the banker said, addingthat the central bank could not even sort out the issue of demonetised Indianbanknotes, which was supposed to come into the country.

Source: The Himalayan Times, 9^th January  2018