Lately, there has been a lack of liquidity in the market. Liquidity has come under pressure as the Corona epidemic has had a simultaneous impact on the economy, the festive mood, and government shutdowns.
The government has been in a state of ‘shutdown’ since midnight on Wednesday as parliament failed to pass a replacement budget for the current fiscal year. The lack of liquidity in the market has also led to the government not being able to spend anything until the budget is passed by the parliament. This has put further pressure on the lack of liquidity seen since last month.
Bankers say some banks lack the money to maintain the mandatory liquidity ratio (CRR), i.e. the deposit-loan ratio at 3 percent. It is estimated that the banking system may come to a standstill if the budget is not passed on the 4th of this month.
Economist Keshav Acharya says, ‘Deposits are declining, that is, market money is being deposited in government accounts, but if the government does not spend, there is no money in the banks. In this case, the bank cannot make any investment. The government needs to take care of this. ‘
The biggest impact of the government shutdown The lack of liquidity in the market seems to have put more pressure on the market as tens of millions of rupees flowing from the government accountable to the daily market are stuck in the account. According to the Office of the Comptroller and Auditor General, there is about Rs 100 billion in the government account in mid-August. The revenue collection on Thursday is 4.14 billion.
Statistics from the Office of the Comptroller and Auditor General show that Rs 182.4 million was spent from the government account in mid-August alone. On average, Rs 150 to 200 million is spent daily from government accounts alone.
No matter how much money is in the government account, the government cannot release it for any work unless the parliament gives its permission. Banks say that there is a problem in depositing a large amount of money in government accounts and withdrawing deposits from banks.
Bankers say that the situation could be dire if the government fails to pass the replacement budget from the parliament on April 15. In addition, deposits have plummeted due to the increase in festival-oriented imports. Similarly, a liquidity crunch has been created due to increased demand for loans.
Increasing interbank lending At present, the CD ratio of banks’ deposits has reached an average of 88. However, the CD ratio of about half of the banks has exceeded 90. The limit of such a ratio has been fixed by Nepal Rastra Bank at 90. At present, the CD ratio of Nabil Bank, Investment Bank, and Mega Bank is above 90. That is, most banks have almost reached the end of their lending capacity.
At present, banks are running out of money to borrow money from other banks. Bankers say that government banks, which lend to other commercial banks, have also started asking for loans from other banks.
As interbank lending has started to rise, interest rates have also skyrocketed. At present, the interest rate has reached around 5 percent. According to Nepal Rastra Bank, such an interest rate has reached 5.88 percent. Such loans are also in short supply as the demand for interbank loans has increased everywhere.
Why the pressure on liquidity?
At the same time as the last fiscal year, banks and financial institutions had about Rs 200 billion more liquidity but now there is only Rs 40 billion liquidity in the market. This amount is also borrowed by banks and financial institutions from NRB. Banks should repay such an amount within a week.
The government account has been closed since Thursday. As of Friday, Rs 150 million to Rs 180 million was coming from the government account alone. This is a time when government spending is not high.
However, the lack of liquidity in the banking system has been increasing since the beginning of the current fiscal year.
Why did this happen?
Chairman of the Nepal Bankers’ Association Bhuvan Dahal says, “A large amount of money has been spent on imports. In addition to this, the amount of banking system has decreased even after the government repeatedly issued treasury bills (letters issued by the government to raise internal debt).
As of September 12 of the current Fiscal Year, Rs. 471 billion has been collected in the financial system. Similarly, Rs 43.37 trillion has been invested in loans. 85 billion in the first month of the current fiscal year. Banks have invested Rs 57 billion in loans during the period.
Management efforts of NRB The central bank is taking various measures after the lack of liquidity in the banking system. When there is a lot of pressure on the investment system in the banking system, NRB uses various instruments to flow liquidity and draw liquidity when there is a lot of liquidity.
To increase liquidity, NRB has already issued a repo of Rs 70 billion three times in the current fiscal year alone. It has issued Rs 20 billion repo on Thursday alone. NRB has issued a repo to control the lack of liquidity in the banking system and interbank interest rates. The repo issued by NRB on Thursday will mature on September 30.
The repo has been issued for 7 days equal to Rs. This will help in short-term liquidity management in the market. According to Nepal Rastra Bank, Rs 40 billion has been added to the banking system after the repo was issued on Thursday. According to Nepal Rastra Bank, the banks have also availed the statutory standing liquidity facility (SLF) of Rs 3.5 trillion by mid-August of the current fiscal year.
Not uncommon: Dahal Some bankers say that it is normal for deposits to decline as demand in the market increases as the tenth approaches. Bankers’ Association president Bhuvan Dahal said, “Some deposits have been imported. Some have invested in government debt. The pressure on liquidity is gone! ‘
However, he claimed that the situation was not as dire as rumored outside. He says there is no shortage of liquidity to stop any bank from giving loans. “There is definitely pressure on liquidity. However, the situation is not dire. Our banking system has about 100 billion liquidity. Besides, there are 100 refinances, ‘Dahal said while talking to Farakdhar.’ Have you heard that any bank has not given loans? Now is the time to increase remittances. The problem will be solved soon. ‘
He says that if the government fails to spend even after the next 4 days, there will be problems. He adds, “It’s not a big problem yet. However, if the situation remains the same even after the 4th of this month, problems may arise. Some banks can’t invest. ‘However, Dahal is confident that the budget will be passed by the parliament soon.
Unfortunate situation: Former Governor Rawal Former Governor Tilak Rawal says it is unfortunate that the lack of liquidity in the market has escalated. In a conversation with Farakdhar, Rawal says, “The situation has become dire. A very sensitive issue like budget should not have been stopped like this. You have to think immediately, otherwise, the situation could get very difficult. ‘
He said that while the loans for deposits are increasing, the loans will also increase.
Former Governor Dipendra Bahadur Kshatriya, on the other hand, claimed that the situation was more confusing. “There are signs of pressure on liquidity,” he said. However, this is not the case. No government expenditure has been incurred. However, he said that there would be problems in liquidity management if the budget could not be spent for a long time.