The average interbank rate - the interest at which a commercial bank lends to other commercial banks - fell to 4.21 percent on Wednesday from the recent peak of 6.79 percent reported on February 14. [break]
Although the interbank rate of Wednesday is slightly higher than 4.15 percent of Tuesday, the transaction amount fell to Rs 2.79 billion on Wednesday from Rs 8.58 billion recorded on Tuesday. Number of transactions also fell to 16 on Wednesday from 45 on Tuesday.
Between mid-2009 to mid-2011 when the banking sector faced liquidity shortage and eventually crisis, the average interbank lending rate tanked 15.09 percent on January 7, 2010, Nepal Rastra Bank´s report shows. As the liquidity situation improved, the rate fell down to as low as 0.3 percent on September 3, 2012.
Financial institutions generally resort to interbank lending - or borrow money from other financial institutions - after cash parked in their coffers deplete and they cannot meet borrowers´ demand. In such situations, banks like Rastriya Banijya Bank that are highly liquid lend money to those that feel the crunch due to heavy investment in tools like treasury bills or heavy lending.
“So far, we haven´t faced a liquidity crisis of the magnitude seen around two years ago, as only a handful of banks are borrowing from other institutions,” NIC Bank CEO Sashin Joshi told Republica. He made the comment referring to the excess liquidity of around Rs 8 billion that the banking sector currently holds. “We hope the situation will come to normal soon,” Joshi said.
Banks started facing liquidity shortfall earlier this month as the first installment of taxes collected from the private sector in mid-January remained locked up in the state treasury due to the government´s inability to ramp up capital spending.
Nepal Rastra Bank report shows the government had stockpiled Rs 43.61 billion in its coffers till mid-January - which marginally came down to Rs 43.52 billion as of mid-February - as against Rs 10.99 billion recorded in mid-July 2012.
Inability to spend this money ultimately reduced the portion of excess liquidity to less than Rs 7 billion earlier this month from around Rs 40 billion reported in mid-July 2012.
This falling liquidity position immediately triggered alarm as credit demand was going up without significant increment in deposit collection. That´s when few banks resorted to interbank lending while others dipped into statutory liquidity facility - money invested in tools like treasury bills - under which the central bank extends loans to financial institutions for a period of up to five days at eight percent interest rate.
“But after the government released around Rs 5 billion earlier this month to settle pension liabilities and increased capital spending by close to Rs 3 billion in between mid-January and mid-February, normalcy is gradually being restored,” Joshi said.
“We hope things will improve further as many banks are close to meeting the 80-percent capital-deposit ratio, which means they won´t be able to lend more. This will also ease the situation.”
Related story
NRB to provide daily liquidity facility to BFIs amid ongoing li...
