NRB's refinance

It is good news for the banking sector that Nepal Rastra Bank (NRB) is implementing a new refinance instrument to release additional liquidity into the market from next week – a move many experts believe is the right step to confront the looming financial crisis. There is no disagreement that the country’s economic condition, which is hostage to our chaotic politics, is constantly worsening both in the real and monetary fronts. Shrinking economic growth rate and squeezing industrial activities are some glaring examples of the poor health of the real sector. However, there are still some bright spots. For example, revenue is growing though the growth rate has slowed and capital expenditure, which mainly finances development activities, has lately been increasing.



However, the scenario of the monetary sector is quite depressing. Along with persistent high inflation that has lately crossed 11 percent, chronic shortage of liquidity has greatly chocked banks’ capacity to make fresh investments in the absence of which both growth and employment have taken a blow. The liquidity shortage became so severe that the inter-bank lending rate jumped up to 13 percent two months earlier and banks were forced to raise their deposit interest rates to as high as 12 percent in a year-long fixed account in order to attract additional deposits. Likewise, lending rates also soared by four percentage points on an average in a one-year period. As a result, many business ventures that were financially viable just a year back are now looking shaky.



Not that Nepal Rastra Bank (NRB), the central bank of the country, has remained indifferent toward the problems. We believe it used all available instruments to deal with the liquidity crunch, including an injection of Rs 15 billion worth of short-term capital into the market. But the outcomes remained pessimistic and the market continued to suffer from liquidity shortage. Against this background, it is widely expected that the central bank’s refinance, which will be made available to financial institutions at an annual rate of 7.5 percent against collaterals of their good loans, will help to ease the liquidity crunch, thus enabling them to make fresh investments.



It is good that NRB has taken a number of measures to prevent the use of the facility in sectors that are overheated such as the realty sector. We believe that the six sectors that NRB has specified for refinance are the right ones. At the same time, we also urge the central bank to be cautious over the possible overflow of liquidity when refinance will come into implementation. If due attention is not paid in that direction, it will further help soar inflation, further aggravating economic problems.

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