October 1: Banks and financial institutions (BFIs) have demanded Nepal Rastra Bank (NRB) to issue repurchase agreements (repo) almost double than the amount placed for bidding by the central bank. NRB has repeatedly issued repo of Rs 130 billion in the last one month due to liquidity crisis in the banking sector, in which BFIs have demanded an average of 2.48 times more. 

In terms of money, A, B, and C class banks and financial institutions have demanded Rs 322.85 billion to manage liquidity. This indicates that the banking sector is facing extreme liquidity crisis. According to the central bank, all the banks have been taking part in the bids.

Due to the liquidity crisis in the banking sector, the NRB had issued repo five times after September 2. The demand has been more than the amount placed for bids.

Some stakeholders have also suspected that the banks have artificially created a liquidity crisis. Commercial banks disbursed Rs 31 billion in the third week of September. Deposit collection during that period is only Rs 8 billion.

Banks have expressed dissatisfaction over the implementation of credit-deposit (CD) ratio by the central bank. Stakeholders suspect that the BFIs might have created artificial crisis due to this very reason. However, the repeated issuance of repo by the NRB and the application for bids surpassing the demand for repo confirm that the liquidity crisis in the banking sector is genuine.

When there is liquidity crisis, NRB releases money to the banking sector through instruments such as repo. A limited amount is kept for bidding and BFIs can participate in the bidding process.

Executive Director and chief of the Public Debt Management Department of NRB, Naresh Shakya, confirmed that there is liquidity crisis in the banking sector. “We have been issuing repo several times due to the liquidity crisis in the market. Every time there is more demand than the amount put in for bidding,” he said, “It seems that there is a huge liquidity crisis in the banking sector.”

Chairman of the Nepal Bankers Association Bhuvan Dahal also said that the problem of liquidity crisis persists and there are indications that this problem will not be resolved immediately.

“We were hopeful that the liquidity crunch would be resolved soon and interest rates would come down from mid-October. It was said that liquidity would come through refinancing, remittances and government spending. However, it did not seem to happen immediately,” he said “Now the inflow of remittances has decreased. The balance of payments (BOP) is also negative. The negative signals in such indicators are likely to prolong the liquidity crunch.”

He said that now the banks should reduce the flow of credit. “Despite the liquidity crunch, there is a huge flow of credit. If this continues, the situation could get worse,” he said, “Therefore the banks should tighten the flow of credit. In addition, the Ministry of Finance and the central bank should also play a supportive role.”