With excessive liquidity in banking system, NRB conducting reverse repo

With the country’s banking system flushed with liquidity, Nepal Rastra Bank (NRB) is conducting a reverse repo worth Rs 20bn to mop up excess liquidity in the market.

A reverse repo is a monetary mechanism through which the central bank absorbs additional liquidity of the banking system by paying certain interest rates.

Issuing a notice, the NRB has said that it is going to mop up Rs 20bn for July 25 (for a period of 14 days). The central bank is conducting the reverse repo for the third time within Ashad.

With the end of the current fiscal approaching, there has been a huge surge in government payments, which ultimately comes to the banking system. With demands for loans drying up, investable capital has been piling up in the banking system in recent days. As of July 9,  investable capital worth Rs 440bn has been accumulated in banks and financial institutions (BFIs). The deposits of BFIs amounted to Rs 5,715bn, while loans totaled Rs 4,861bn.

Since Baisakh, the banking system has collected Rs 242bn in deposits. In the first three weeks of Ashad (the last month of the fiscal year), Rs 147bn in deposits have been added to the banking system.

With the liquidity position becoming easier, the interbank interest rate has also decreased. The interbank interest rate has come down from seven percent during the review period to 1.36 percent on July 9.

The BFIs that were experiencing a liquidity crunch until a few months ago are now facing problems of non-disbursement of loans. While liquidity is increasing, bankers say demands for loans have remained low.

While the commercial banks introduced a new home loan scheme by reducing the interest with the expectation that the construction sector will be energized, they are seeing no demand for loans.

As there is no demand for loans currently, the CD ratio of commercial banks has been continuously decreasing. The CD ratio which was 88.07 percent in mid-July, 2022, has fallen to 82.03 percent on July 24, 2023.

As per central bank regulatory norms, banks can disburse 90 percent of their deposits in loans. Banks have to maintain the credit-to-deposit ratio (CD ratio) at 90 percent.

As the government also spends in the last quarter massively, a large amount of cash is being deposited in banks in the period. BFIs generally make little lending during the last quarter of the fiscal year.

The credit expansion to the private sector in the first 11 months of the current fiscal year is far less than what the BFIs lent during the same period last fiscal year. Bankers say lending will not grow much in Ashad, the last month of the fiscal year, in which BFIs will be more focused on loan recovery.

According to bankers, the private sector has not sought bank loans with the deepening economic downturn. On the other hand, retail loans such as housing loans and auto loans have not grown with interest rates still remaining high. While the BFIs have been gradually lowering the loan interest rates, te demand for loans has not surged as expected. “The demands for loans have remained subdued due to the state of the economy and businesses,” said a banker.

Bankers say the other reason behind the sluggish lending is banks have become more cautious in loan disbursement due to a sharp rise in non-performing loans (NPLs).