September 24: The lack of demand for loans in Banks and Financial Institutions (BFI) has led to a high accumulation of deposits in them. Nepal Rastra Bank has been compelled to use the 28-day deposit collection equipment to manage the liquidity as there is an excess liquidity of Rs 200 billion in the banking system.
Stating that there has been an extraordinary liquidity situation in the banking system, the Open Market Steering Committee of the central bank took a decision on Thursday (September 23), of using a deposit collection equipment to absorb Rs 30 billion worth of liquidity from the banking system for a long period.
Earlier, short-term government bonds like treasury bills were issued to collect internal debts. In addition, reverse repo was issued in the month of Shrawan (mid-July to mid-August) under the monetary management to absorb the liquidity from the market.
Depending upon the situation, the central bank can issue the deposit collection equipment for a maximum of 90 days. Nepal Rastra Bank will withdraw the money from the bank accounts of the successful bidders and keep it as deposit. This helps in the mopping of excess liquidity in the banking system for a specified period of time.
“Even if it is a small amount, absorption of liquidity from the banks prevents the interest rate on deposits from decreasing too much. The flow of credit helps in keeping the overall economy going,” says Dr Gunakar Bhatta, the spokesperson for Nepal Rastra Bank. Banks have been emphasizing on the use of the deposit collection instruments as new loans weren’t distributed as much as they had expected.
Bhuwan Kumar Dahal, the chairman of Nepal Bankers’ Association, said that it was more appropriate for the central bank to keep the banks’ deposits instead of the banks keeping a high capital for a long time.
Former banker Parshuram Kunwar says that the central bank withdrawing only Rs 30 billion when there is a liquidity of more than Rs 200 billion isn’t enough. “Absorbing only Rs 30 billion when there is an excess liquidity of hundreds of billions is too less,” he said, adding, “Our neighboring country India also has excess liquidity due to the lack of credit flow. Their government has taken up a lot of internal debt to manage this. The Reserve Bank of India has made arrangements accordingly as it may make things uncomfortable by raising a lot of money in this way.”
Former banker Kunwar says that the high liquidity situation in India has reduced the interest rates of deposits rather than on inflation. He claims that Nepal is also in a similar situation. He points out that things should not be made difficult for the customers by making the rates on deposits lower than the rate of inflation for a long time.
Some banks have increased the interest rates on deposits despite of having sufficient investable capital.
Banks have reduced the interest rates from a minimum of 3 percent to a maximum of 8.5 percent. Recently, banks like Civil Bank and Nabil Bank have been in the forefront in raising the interest rates on term deposits. Nabil Bank has announced to pay up to 9.5 percent interest on personal term deposits. They have announced that they will however flow loans at 7 percent. Similarly, Civil Bank has kept a maximum rate of 6 percent on deposits in the month of Bhadra (mid-August to mid-September). However, it has announced a rate of 8.75 percent on personal term deposits for the month of Ashoj (mid-September to mid-October).
The central bank does not think that it’s abnormal to increase the rates on personal term deposits even during a high liquidity situation. NRB Spokesperson Dr. Bhatta points out that it is appropriate to determine the interest rates now as the banks will have to raise long-term deposits for long-term investments. According to him, the banks should not only depend on general savings but raise long-term personal deposits too. However, they must announce the interest rates one month in advance.