May 18: As the liquidity crisis deepened, banks and financial institutions borrowed loans from Nepal Rastra Bank (NRB) exceeding their deposit collection.

In the current Fiscal Year (FY 2021/22), the NRB has provided liquidity of Rs 7.42 trillion to the banking system as of May 12. The amount disbursed to the market by the central bank is more than the total deposits of the banks. As of April, banks have deposits of Rs 4.97 trillion. 

NRB has arranged various monetary instruments to facilitate the flow and mobilization of liquidity depending on the market conditions. Banks have resorted to borrowing heavily in the current fiscal year because of the liquidity crisis in the market due to higher credit flow than deposit collection. 

NRB informed that as of April this year, deposits in banks and financial institutions have increased by 4.1 percent (Rs 237 billion) as compared to the previous year, while loans have increased by 12.8 percent (Rs 558 billion). 

According to the central bank, banks have borrowed Rs 6.91 trillion through the standing liquidity facility. Similarly, Rs 325.91 billion has been issued through repo, Rs 160.76 billion through overnight repo and Rs 55.91 billion through direct purchase instruments. Of this, Rs 211 billion is with banks. 

NRB issues a repo to send a certain amount to the market. However, the banks can take LLF and overnight repo as required by pledging their investments in instruments including government bonds. Banks have been renewing the LLF facility as it is provided for only 7 days. 

Banks have started borrowing money through monetary instruments to manage the required cash reserves ratio (CRR) with the NRB as deposits in banks have not increased. Banks and financial institutions should keep 3 percent of the total deposit in the account of the central bank as CRR. 

Since there hasn’t been any increase in deposit collection, banks have been managing the prescribed CRR by taking loans from the central bank. NRB has prescribed seven percent interest on LLF loans. NRB has increased the interest rate of LLF from 5 percent from December 27. The use of SLLF has not diminished even after the increase in the interest rate. 

Chairman of the Nepal Bankers' Association Anil Kumar Upadhyaya says that the banks are using the facility provided by the central bank under compulsion. "Deposits have not increased as expected," he said, "Banks have used the facilities as prescribed by the regulator to manage the financial indicators." 

Officials at the NRB say the regular use of emergency equipment is a weakness. "Regular use of liquidity management tools is a weakness for banks," said Prakash Kumar Shrestha, executive director of the NRB. 

The NRB has implemented the provision of CD (Credit-Deposit) ratio in the banks from the current fiscal year through the monetary policy. Accordingly, the banks have been directed to maintain the CD ratio at 90 percent by mid-July 2022. However, as of April, the CD ratio of 18 banks is above 90 percent.