KATHMANDU: Nepal Rastra Bank’s (NRB) move to inject Rs20 billion into a ‘cash-strapped’ banking sector barely caused a ripple with only 9.5 percent of the securities up for grabs being subscribed, leading officials to question claims of a liquidity crunch. The central bank floated a two-week repo, a money market instrument, with a fixed annual yield of 4.8753 percent on Friday following complaints of a severe erosion in the liquidity position of banks and financial institutions. But banking institutions subscribed only Rs1.9 billion worth of securities out of the Rs20 billion worth of instruments offered. “This indicates claims made by the banking sector of a liquidity crunch are not true,” said Trilochan Pangeni, head of the Public Debt Management Depart-ment at NRB. Of the Rs1.9 billion worth of repo subscribed on Friday, Rs1 billion worth of securities were acquired by Mega Bank and the remaining Rs900 million worth of securities by Shangri-la Development Bank. This is not the first time in this fiscal year that a repo floated by NRB remained undersubscribed. Two previous attempts by the central bank to inject funds into the banking sector had met with similar results. On August 17, when NRB launched the first repo in this fiscal year worth Rs5 billion, banks and financial institutions subscribed only Rs10 million worth of securities. The second repo held on November 15 ended with no participation of banks and financial institutions.
“Bankers report one thing to us and act in an indifferent manner when we try to find a solution to their problems,” said Pangeni. Bankers, on the other hand, said the securities remained undersubscribed this time because “they were floated on a Friday”. “Banks generally do not want to divert funds on a Friday because everything remains closed during the weekend on Saturday. And we want to keep our system full-proof during the weekend,” said Anil Shah, president of Nepal Bankers’ Association. “We hope more banks and financial institutions will take part in the operation if it is held on a Sunday.”
Meanwhile, NRB plans to float a repo worth Rs10 billion on Sunday with an interest rate of 4.8701 percent. However, bankers say that this kind of money market instrument launched by the central bank will barely help them. “A repo launched by NRB will definitely inject funds into the market,” said Shah. “But this money can only be used to maintain the cash reserve ratio and statutory liquidity ratio, which is not our need at the moment as the banking sector is facing a shortage of funds that can be extended as loans.” Banks currently have to maintain a liquidity ratio of 20 percent, meaning 20 percent of the total deposits have to be invested in securities like repo, treasury bills and bonds or deposited with the central bank. “Most banks have been maintaining this ratio,” said Shah. “What they are looking for is a solution that can increase the stock of funds that can be issued as loans to borrowers.”
Banks are currently allowed to convert 80 percent of their deposits into loans. This means that for every Rs100 collected in the form of deposit, only Rs80 can be extended as credit. This, in technical terms, is referred to as credit to core capital-cum-deposit (CCD) ratio, which should stand at a maximum of 80 percent. “Since deposit flows have slowed down lately, the CCD ratio in some banks has exceeded the 80-percent mark,” said NRB spokesperson Narayan Prasad Paudel, without disclosing the names of financial institutions that have breached NRB regulation. To resolve this issue, banks need to raise fresh deposits or increase the core capital, said NRB officials.