KATHMANDU, May 2: Nepal Rasta Bank (NRB) has been soaking liquidity from the bank and financial institutions (BFIs), even though the latter say that they are facing hard time to find lendable funds.
The central bank mopped up Rs 101.1 billion from the banking system in the first eight months of the current fiscal year through open market operations. The central bank has used various instruments like deposit collection and reverse repo to absorb excess liquidity from the market.
However, the cash that the central bank has mopped up is only one-fourth of what it had absorbed in the corresponding period of the last fiscal year. According to the data, the central bank mopped up nearly Rs 470 billion in the first eight months of the last fiscal year.
Bankers say that the current problem is about the shortage of lendable funds whereas the mopped up cash is net liquid assets that BFIs must maintain.
Similarly, the NRB has also been mopping up liquidity under the interest rate corridor system that the central bank introduced last year to curb interest rates volatility.
Out of the total liquidity mopped up in the fiscal year, Rs 29.80 billion was mopped up through 140-day deposit collection auction under the corridor system, Rs 7.05 billion through 90-day deposit collection auction and Rs 64.25 billion through reverse repo auction on a cumulative basis, according to the central bank data.
However, the central bank has not used any such instrument in recent months as BFIs are finding investment opportunities due to government borrowing through the central bank. The central bank last mopped up liquidity on January 2 through a 14-day deposit collection, raising Rs 600 million from the market. Amid complaints from the BFIs regarding credit crunch problem, the central bank had also issued a repo -- a short-term liquidity facility -- of Rs 20 billion on January 26. But the offer got lukewarm response as BFIs said that such liquidity facility does not address their credit crunch problem resulting from the credit to core-capital-cum-deposit (CCD) ratio.
The CCD requirement that the central bank enforces to maintain adequate liquidity in the system allows a bank to lend only up to 80 percent of its total deposits and core capital.
It says that 20 percent should be held as cash reserves and government securities investment, among other liquid assets. For example, if a bank's total deposits and core capital amounts to Rs 100, it can only lend up to Rs 80 and maintain Rs 6 as cash reserves and Rs 8 in government securities investment, among others.
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