Nepal Rastra Bank (NRB) Governor Yubaraj Khatiwada, today, said that the central bank would not tighten monetary policy to address the problem of liquidity surplus, as it could constrain economic growth.
“We won’t adopt strict measures just to tame the problem of liquidity surplus as it could hit economic growth,” the governor said addressing a programme organised to mark NRB’s 59th anniversary.
The governor’s statement is an indication that the central bank will not raise cash reserve ratio (CRR)— the portion of total deposits that banks and financial institutions must park at NRB — in the near future. His comment is also an indication that NRB will not raise statutory liquidity ratio (SLR) — investment that banks and financial institutions have to make on government securities like bonds and treasury bills — in the near future.
Hike in CRR and SLR does mop up excess liquidity from the banking sector, which ultimately constricts banking institutions’ ability to extend loans, affecting economic growth.
Nepali banking sector has been facing a problem of excess liquidity since beginning of this fiscal, largely because of hike in remittance income. Currently, banking sector has excess liquidity of around Rs 50 billion.
To absorb this idle money, NRB has used reverse repo at least 16 times since September. But since reverse repo is a tool that helps in mopping up liquidity for a short period of time, the banking sector has not received much respite from the problem.
“In this regard, NRB must make amendments to laws and come up with a provision that paves the way for it to issue long-term bonds particularly to tame the problem of liquidity surplus,” former NRB governor Bijay Nath Bhattarai said.
Although incumbent Governor Khatiwada welcomed the suggestion, he said: “We will see how the situation transpires in the coming months. But we don’t have immediate plans on using long-term tools to mop up excess liquidity.”
One of the reasons why liquidity is continuously building in the banking system is low demand for loans.
Earlier, it used to be said that the demand for credit is low in the country because of high lending rates charged by banking institutions. To make loans cheaper, NRB has asked banks and financial institutions to limit interest spread — the difference between lending and deposit rates — at five per cent within mid-July.
But this provision has been denounced by banking institutions, International Monetary Fund (IMF) and World Bank (WB), as they say the directive prevents banks and financial institutions from extending loans to riskier clients, like small and medium enterprises, thus, reducing people’s access to finance.
“We have previously said that the lending rates should be slightly higher than the base rates. But if the gap is too much and the market cannot make those corrections, the regulator will have to intervene,” the governor said, adding, “Reduction in lending rates, coupled with identification of new sectors that might need credit, will raise the demand for loans.”
Khatiwada also said it was an irony that so much of money has not been put to productive use, while many development works have not been initiated in the country due to lack of funds and the country is becoming more dependent on imports.
“To reduce the country’s dependence on imports of agricultural goods, NRB had directed banks and financial institutions to extend a certain portion of loans to agricultural sector,” Khatiwada further said defending measure taken by NRB on directed lending, which has been criticised by IMF and WB.
source: the himalayan times,27 april 2014
LINK
“We won’t adopt strict measures just to tame the problem of liquidity surplus as it could hit economic growth,” the governor said addressing a programme organised to mark NRB’s 59th anniversary.
The governor’s statement is an indication that the central bank will not raise cash reserve ratio (CRR)— the portion of total deposits that banks and financial institutions must park at NRB — in the near future. His comment is also an indication that NRB will not raise statutory liquidity ratio (SLR) — investment that banks and financial institutions have to make on government securities like bonds and treasury bills — in the near future.
Hike in CRR and SLR does mop up excess liquidity from the banking sector, which ultimately constricts banking institutions’ ability to extend loans, affecting economic growth.
Nepali banking sector has been facing a problem of excess liquidity since beginning of this fiscal, largely because of hike in remittance income. Currently, banking sector has excess liquidity of around Rs 50 billion.
To absorb this idle money, NRB has used reverse repo at least 16 times since September. But since reverse repo is a tool that helps in mopping up liquidity for a short period of time, the banking sector has not received much respite from the problem.
“In this regard, NRB must make amendments to laws and come up with a provision that paves the way for it to issue long-term bonds particularly to tame the problem of liquidity surplus,” former NRB governor Bijay Nath Bhattarai said.
Although incumbent Governor Khatiwada welcomed the suggestion, he said: “We will see how the situation transpires in the coming months. But we don’t have immediate plans on using long-term tools to mop up excess liquidity.”
One of the reasons why liquidity is continuously building in the banking system is low demand for loans.
Earlier, it used to be said that the demand for credit is low in the country because of high lending rates charged by banking institutions. To make loans cheaper, NRB has asked banks and financial institutions to limit interest spread — the difference between lending and deposit rates — at five per cent within mid-July.
But this provision has been denounced by banking institutions, International Monetary Fund (IMF) and World Bank (WB), as they say the directive prevents banks and financial institutions from extending loans to riskier clients, like small and medium enterprises, thus, reducing people’s access to finance.
“We have previously said that the lending rates should be slightly higher than the base rates. But if the gap is too much and the market cannot make those corrections, the regulator will have to intervene,” the governor said, adding, “Reduction in lending rates, coupled with identification of new sectors that might need credit, will raise the demand for loans.”
Khatiwada also said it was an irony that so much of money has not been put to productive use, while many development works have not been initiated in the country due to lack of funds and the country is becoming more dependent on imports.
“To reduce the country’s dependence on imports of agricultural goods, NRB had directed banks and financial institutions to extend a certain portion of loans to agricultural sector,” Khatiwada further said defending measure taken by NRB on directed lending, which has been criticised by IMF and WB.
source: the himalayan times,27 april 2014
LINK
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