KATHMANDU, Feb 12: Excess liquidity in the banking system has compelled bank and financial institutions to stash Rs 101.35 billion in the central bank's vault even though it fetches interest income of less than one percent.
Bankers lament that BFIs are scrambling to park their excess reserve by subscribing different monetary instrument at ultra-low interest rates because of the lack of investment opportunities.
BFIs would have charged interest of at least seven percent had they been able to extend credits.
The average rate for the reverse repo held on February 3 was mere 0.1155 percent, while the average rate was 0.411 percent for the deposit auction held last week.
Excess liquidity has already dragged down interest rates on deposit to around 3 percent, while lending rate has also fallen to as low as 7 percent.
The open market operation instruments have also proven insufficient to address liquidity surplus that has grappled the banking and financial system for the last two years. Reverse repo and deposit auction are the two main instruments that the central bank has been using to mop up excess liquidity from the banking system.
BFIs are sitting on a huge pile of loanable fund due to continuous rise in deposit and slowing lending growth.
According to Nepal Bankers Association, 30 commercial banks mobilized a total of Rs 1,572 billion in deposits as at January end, while loan disbursement stood at Rs 1,179 billion.
The investment of BFIs in such low yielding instruments can also attributed to 5 percent average interest spread that they are required to maintain as per the central bank's directive. BFIs can count their interest in these instruments which can offset the huge margin that they impose between the deposit and loan interest rates.
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