NRB to conduct Rs 5b reverse repo to absorb excess liquidity

NEPAL Rastra Bank (NRB) will be conducting a reverse repo worth Rs 5 billion on Wednesday to mop up excess liquidity in the market. This is the first reverse repo in three years. By conducting a reverse repo, the central bank absorbs excess cash from the banking system by selling treasury bills to banks and financial institutions (BFI). The last time the central bank conducted a reverse repo was on Sept 15, 2010. According to the central bank, BFIs have excess liquidity worth over Rs 60 billion which prompted the central bank to intervene through reverse repo. “We are issuing reverse repo to bring down the high liquidity level in BFIs and also to keep interest rates in check,” said NRB spokesperson Bhaskarmani Gnawali. Whenever BFIs have excess liquidity, they reduce the interest rate so that depositors will be discouraged from depositing money with them. However, the central bank is concerned about possible capital flight if BFIs lower interest rates. For this reason, the central bank has always been asking BFIs to keep interest rates relatively higher than in India. There has been a tendency among Nepalis to deposit money in Indian banks and insurance products offered by Indian insurance companies whenever interest rates go down here. Bankers said that intervention by the central bank had become necessary to mop up the increased liquidity in the banking sector. Chief executive officer of Himalayan Bank Ashoke Rana said that deposit collection had grown heavily contributing to the prevalence of excess liquidity. “None of the banks now has a credit-to-deposit ratio of more than 75 percent,” he added. As of August-end, commercial banks held deposits of Rs 1,019 billion while lending stood at Rs 757 billion, according to the Nepal Bankers’ Association. It means the credit-todeposit ratio is 74 percent. If the core capital is also added to the deposits to measure the ratio against lending, the ratio will be even lower, thus leading to greater liquidity. NRB has asked banks to keep the credit-to-deposit plus core capital ratio at a maximum of 80 percent. “It clearly indicates that banks have excess liquidity,” said Anal Raj Bhattarai, CEO of Commerz and Trust Bank Nepal. He added that deposits liquidity remained in excess due to low demand for loans compared to the increased level of deposits. Bankers said that due to the higher prevalence of liquidity, they have been lowering the interest rate. “The lending rate for some of the loan products has come down to single digits,” said Bhattarai.