Nepal Rastra Bank (NRB) is mopping up Rs 20 billion from the banking sector next week using a new instrument called ‘term deposit’, as the central monetary authority makes an attempt to cushion the impact of surplus liquidity on the financial system.
The new instrument allows commercial banks, development banks and finance companies to park their money at NRB for a period of three months at interest rates fixed through auction.
This is expected to provide some relief to banks and financial institutions (BFIs) that are currently sitting on extra cash of over Rs 100 billion, which does not generate any yield.
“We have introduced a new instrument to ensure excess liquidity does not distort the market. We will continue to make use of this tool to mop up liquidity based on need,” NRB Deputy Governor Gopal Prasad Kaphle said, adding, “BFIs that want to make use of this (term deposit) instrument should submit a quotation on Tuesday, declaring the amount they want to deposit at NRB and interest yield they are expecting.”
The introduction of an instrument with three-month maturity period indicates that NRB has realised that the problem of excess liquidity in the banking system is not short-term in nature as it had said countless of times last fiscal year.
NRB had declined to make use of moderately long-term instruments to mop up excess liquidity last fiscal citing it wanted to wait and watch the situation.
NRB had reasons for saying this, as the domestic banking sector had previously embraced liquidity surplus and liquidity strain in a relatively short period of time.
But as the country’s foreign income continued to grow last fiscal — largely because of increase in flow of remittance — and demand for credit remained relatively lower, the pile of cash at BFIs continued to grow, triggering a competition of sort among BFIs to slash deposit rates.
To deal with this problem, NRB ended up mopping Rs 611 billion from the banking system in the last fiscal year using short-term instruments like reverse repo of seven to 14 days and outright sale auction.
“It is commendable that the central bank has decided to introduce an instrument with a maturity period of three months to deal with the problem of excess liquidity. However, this tool should not replace short-term tools like reverse repo,” Sanima Bank’s Chief Executive Officer Bhuvan Kumar Dahal said, adding, “To manage the situation now, Rs 20 billion worth of term deposit instrument and Rs 20 billion worth of reverse repo would be ideal.”
Bankers like Dahal have been pushing the central bank to mop up as much liquidity from the banking system, as 30 commercial banks currently have excess liquidity of around Rs 83 billion.
NRB Deputy Governor Kaphle said: “The central bank would use various instruments simultaneously to address the problem of excess liquidity.”
Features of instrument
> Comes with three-month maturity period
> Interest to be fixed through auction
> Principal and interest to be extended upon maturity of instrument
> Cut-off rate on interest could be fixed
> Collateral of securities not required as in the case of reverse repos
source: RUPAK D SHARMA, The himalayan times,15 august 2014
LINK
The new instrument allows commercial banks, development banks and finance companies to park their money at NRB for a period of three months at interest rates fixed through auction.
This is expected to provide some relief to banks and financial institutions (BFIs) that are currently sitting on extra cash of over Rs 100 billion, which does not generate any yield.
“We have introduced a new instrument to ensure excess liquidity does not distort the market. We will continue to make use of this tool to mop up liquidity based on need,” NRB Deputy Governor Gopal Prasad Kaphle said, adding, “BFIs that want to make use of this (term deposit) instrument should submit a quotation on Tuesday, declaring the amount they want to deposit at NRB and interest yield they are expecting.”
The introduction of an instrument with three-month maturity period indicates that NRB has realised that the problem of excess liquidity in the banking system is not short-term in nature as it had said countless of times last fiscal year.
NRB had declined to make use of moderately long-term instruments to mop up excess liquidity last fiscal citing it wanted to wait and watch the situation.
NRB had reasons for saying this, as the domestic banking sector had previously embraced liquidity surplus and liquidity strain in a relatively short period of time.
But as the country’s foreign income continued to grow last fiscal — largely because of increase in flow of remittance — and demand for credit remained relatively lower, the pile of cash at BFIs continued to grow, triggering a competition of sort among BFIs to slash deposit rates.
To deal with this problem, NRB ended up mopping Rs 611 billion from the banking system in the last fiscal year using short-term instruments like reverse repo of seven to 14 days and outright sale auction.
“It is commendable that the central bank has decided to introduce an instrument with a maturity period of three months to deal with the problem of excess liquidity. However, this tool should not replace short-term tools like reverse repo,” Sanima Bank’s Chief Executive Officer Bhuvan Kumar Dahal said, adding, “To manage the situation now, Rs 20 billion worth of term deposit instrument and Rs 20 billion worth of reverse repo would be ideal.”
Bankers like Dahal have been pushing the central bank to mop up as much liquidity from the banking system, as 30 commercial banks currently have excess liquidity of around Rs 83 billion.
NRB Deputy Governor Kaphle said: “The central bank would use various instruments simultaneously to address the problem of excess liquidity.”
Features of instrument
> Comes with three-month maturity period
> Interest to be fixed through auction
> Principal and interest to be extended upon maturity of instrument
> Cut-off rate on interest could be fixed
> Collateral of securities not required as in the case of reverse repos
source: RUPAK D SHARMA, The himalayan times,15 august 2014
LINK
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