Liquidity dips in Banks, may prompt Credit Rate hike

Ajay Chhetri / Kathmandu, June 16: The liquidity crunch in the banking system has started to appear as deposit has dipped down. It has risked the credit rate hike when economic activities reopen.

The “Banking and Financial Statistics” of the Nepal Rastra Bank of the mid-May revealed that total deposit of the bank and financial institutions rose by Rs. 9 billion and credit flow by Rs. 44 billion between mid-April and Mid-May.

However, these were up by Rs. 120 billion and Rs. 167 billion respectively in between mid-March and mid-April.

The conspicuous decline in deposit and credit flows with over month-long prohibitory order has been promoting the interest rate to soar high.

The weighted average interest on deposit in the mid-May rose to 4.81 percent from the 4.47 in the mid- April. Similarly, weighted average interbank rate – which is also operating target of monetary policy – stood 4.12 in mid-May which was 1.26 percent in mid-March.

To contain the volatility in the interest rate, the NRB has injected 14 days repo of Rs. 20 billion, Standing Liquidity of Rs. 67.57 billion, and overnight repo action of Rs 5.33 billion through open market operation in the end of May.

However, In the midst of this cris, the weighted average interest on credit dipped. It slipped to 8.53 percent in mid-May from 8.61 percent in mid-April. This decline is attributable to the halt in the economic activity after the Prohibitory Order enforced since April 30 to curb spread of COVID-19.

As the government is preparing to ease the Prohibitor Order and its spending is supposed to begin in the mid-June, maintaining stability in rate of interest seems challenging.

However, the execute director of the Nepal Bankers Association, Anil Sharma, said that the liquidity in the banking sector has gone down. But he believes that government spending in the beginning of the current fiscal year will rise the deposit which will help banks to flow credit thus the rate of interests on credit will be accommodated.

Similarly, the spokeperson of the Nepal Rastra Bank, Dev Kumar Dhakal, said that liquidity in the banking system has been down. He added that it generally occurs in the end of fiscal year.

He however said that government spending will help maintain balance in rate of interest on deposit as well as lending. He also assured that NRB is ready for appropriate measure to accommodate the interest rate, if its distracted. RSS