KATHMANDU, SEP 06 - Nepal Rastra Bank (NRB) has been reluctant to issue the "deposit collection" instrument for the second time as its suspects an interest-rate cartel between banks and financial institutions (BFIs).
The first issuance of the instrument two weeks ago, when the NRB mopped up Rs 20 billion from the financial system, saw the interest rate at 0.69 percent, whereas the average interest rate on reverse repo issued three weeks ago was as low as 0.0002 percent.
The lowest interest rate offered by banks was 0.11 percent, but some banks quoted as high as 9 percent, according to a senior central bank official. However, the highest accepted rate was 0.99 percent. "This clearly indicates a cartel has been formed," said the official. "This has discouraged us to issue the instrument again."
The central bank introduced the new instrument as the reverse repo, in which NRB mops up liquidity from BFIs by putting treasury bills as collateral at BFIs, could not address the excess liquidity situation. As the NRB should not put any collateral for the "deposit collection" instrument, it can absorb the liquidity at a bigger scale.
The NRB official said although the instrument was issued at a time banking system was facing an excess liquidity of Rs 80 billion, "the Interest rate quoted by banks remained higher than what the market force would have determined."
However, a chief executive of a leading bank denied the formation of any such cartel given the presence of such a large number of banks. "It is natural to see higher interest on 'deposit collection' as banks assume they are receiving interest on deposits," he said. "The reverse repo is just an instrument through which banks largely seek to park their excess liquidity at the central bank while earning little."
The maturity period of "deposit collection" is three month, reverse repo usually has one-week maturity period. "In fact, there should 2 percent interest rate on 'deposit collection'," the CEO said.
With the banking system still witnessing excess liquidity, bankers said the central bank should absorb liquidity at a bigger scale through "deposit collection" to ease the situation.
However, the NRB official said they were studying whether to absorb liquidity through "deposit collection".
According to the NRB, the situation has eased a bit as the excess liquidity has decreased to Rs 35 billion currently from Rs 80 billion two weeks ago. "If the situation improves, the central bank's intervention may not be needed,' said the NRB official.
Bankers say they are concerned about their failure to make earnings from the 20 percent of liquidity excluding the loanable 80 percent of deposits and core capital. As per the central bank, the credit-to-deposit ratio is calculated by adding the core capital to deposits.
"The average credit-to-local currency deposit ratio with banks is around 77 percent, and they can increase the amount to 80 percent easily," said Ashoke Rana, chief executive of Himalayan Bank. "The main problem is how to make productive investment of the 20 percent liquidity."
The market has been seeing excess liquidity for the last two fiscal years as banks failed to lend, as deposits piled up. As a result, NRB didn't provide standing liquidity facility (SLF), a short term liquidity injection (with five-day maturity period), for the entire 2013-14.
Source: The Kathmandu Post