Banks grapple with excess liquidity as demands for loan disappear

Banks and financial institutions (BFIs) are awash with cash. Although the lending capacity of BFIs has increased, demand for loans has dropped. Recognizing excessive liquidity in the banking system, the Nepal Rastra Bank (NRB) has absorbed Rs 180bn from the banking system through various monetary instruments since mid-December.

Additionally, the central bank has been working to maintain inter-bank lending rates within the prescribed limit. Although the central bank had previously stated that it would prevent inter-bank lending rates from falling below three percent, these rates have, in fact, dipped below three percent for some time. In March of the previous year, the inter-bank lending rate had surged to as high as 7-8 percent due to a tight liquidity situation.

“After the inter-bank rate fell below the prescribed limit, we absorbed liquidity from the system through deposit auctions. This action helped the interbank lending rates to go above the limit on Jan 3 and 4,” explained NRB Spokesperson Dr Gunakar Bhatta. “Banks currently hold liquidity of around Rs 100bn, excluding the four percent cash reserve ratio that they are required to maintain.”

One of the contributing factors to the increasing liquidity in the banking system is the drop in imports. The demand for credit from other sectors is also not satisfactory, Dr Bhatta added.

Commercial banks, development banks, and financial institutions collectively have a credit extension capacity of Rs 433bn. The total deposits of BFIs have risen to Rs 6.06trn, with Class ‘A’ banks alone holding deposits amounting to Rs 5.37trn. Development banks and financial institutions have mobilized Rs 696bn in deposits. According to the central bank, banks are reporting an annual deposit growth of Rs 500bn. However, their lending capacity has not seen a corresponding increase.

BFIs have invested around Rs 5.02trn, with the investment of commercial banks alone reaching approximately Rs 4.44trn. Similarly, development banks and financial institutions have extended credit amounting to an additional Rs 582bn.

Bankers acknowledge that banks have not been able to invest as much as they wanted. “Banks are finding themselves awash with loanable funds also because the working capital policy prohibits them from extending new loans in the final month of the quarter,” Nepal Bankers Association (NBA) President Sunil KC said. “As banks prioritize the recovery of old loans over new investments in the last month, the size of loanable funds has consequently expanded.”

Private sector leaders say that businesses are struggling to meet their existing obligations, let alone secure new credit. Chandra Prasad Dhakal, president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), said the private sector was seeing a 20-30 percent decline in both production and sales. “This has made loan servicing difficult for businesses,” Dhakal said. “Businesses are hesitant to seek new credit also due to uncertainties about policy stability in the coming days.”

Dhakal, however, said he was hopeful of positive upturn in the coming days. “With the gradual fall in interest rates, confidence is expected to be restored among both the private sector and general consumers. The recent policy decisions of the central bank are favorable. The government has also expressed commitment to settle outstanding dues and expedite capital spending,” Dhakal added. A recent survey conducted by the Confederation of Nepalese Industries (CNI) reveals that the overall demand has declined. “Industrial raw material prices are rising, but their import is falling,” the CNI survey report stated.