NRB, banks at odds over diagnosis of liquidity problem
KATHMANDU, Jan 7: Bank and financial institutions (BFIs), which have been seeking financing facility from the Nepal Rastra Bank (NRB) to ease 'liquidity crunch' problem, have showed reluctance to receive funds from the central bank under repo having two-week maturity.
Repo refers to a type of central bank's financing facility to BFIs when there is shortfall of funds to meet cash reserve requirement (CRR).
Out of Rs 20 billion offered by the NRB on Wednesday, BFIs subscribed only Rs 1.9 billion, or 9.5 percent, of the available fund. NRB officials say that they decided to issue repo in line with the request of bankers to provide financing facility for addressing liquidity problem.
"We issued the repo to correct liquidity situation at least for a short-term period as BFIs were saying that they have been facing liquidity problem," Narayan Prasad Paudel, the spokesperson for the NRB, said. "However, there was a lukewarm response to our offer," Paudel, who heads the Banks and Financial Institutional Regulation Department of the NRB, said.
However, bankers disagree. The statements of NRB officials and bankers suggest that they are at odds over the understanding and diagnosis of the liquidity problem.
Since the repo instrument can in no way address the liquidity problem, BFIs were not interested in such offer, say bankers. They say that most of the BFIs were struggling to maintain credit to deposit (CD) ratio which is clipping their wings to lend more.
NRB has set the CD ratio at 80:20 which means a bank cannot lend more than Rs 80 out of the deposit of Rs 100.
"The repo can only help to meet the shortfall of the cash reserve that we are required to park at the NRB. But that is not our problem. The need is for a relatively longer-term financing facility that can help us to maintain our CD ratio so that we are in a comfortable liquidity position," Anil Keshary Shah, the president of Nepal Bankers' Association, said.
Asked about whether there were some differences over understanding of the liquidity problem between the BFIs and the NRB, Shah, who is also the CEO of Mega Bank Ltd, said: "It seems so, and we will meet the NRB officials on Sunday to communicate our position properly."
Bankers also say that the repo offered by the central bank was too costly for them even if they decide to borrow for the cash reserve purpose. The central bank has set interest rate for repo 4.8753 percent.
"The interbank lending rate is nearly 3 percent now. At a time when some banks, who are in a comfortable liquidity position, are offering funds at less than 3 percent, there is no reason why we should take it at such a high rate from the central bank," Kishore Maharjan, a vice president of the NBA, said.
However, NRB Spokesperson Paudel told Republica that the repo injects fund into the system thereby providing liquidity. "It's true that banks can borrow with each other at lower rates to maintain cash reserve, but that does not help to inject liquidity in the system. But repo does," he maintained.
Though the repo amount of Rs 20 billion remained undersubscribed on Wednesday, the NRB has decided to offer repo of an additional Rs 10 billion on Friday which will be allocated on Sunday.