December 18: Banks and financial institutions (BFIs) at present have the capacity to extend additional loans of around Rs 600 billion. Due to the increase in deposit collection along with the increase in remittance inflow and economic activities, there is excess liquidity in the banking system.

According to Nepal Rastra Bank (NRB), the total deposits of banks and financial institutions have exceeded Rs 6000 billion. However, the credit-deposit ratio (CD ratio) of banks has decreased due to non-expansion of credit compared to the increase in bank deposits.

Until last Thursday, banks and financial institutions had deposits of Rs 6003 billion and had extended loans of Rs 4992 billion. In the current fiscal year, when banks collected deposits of Rs 232 billion, credit flow expanded by only Rs 114 billion.

Due to the increase in deposit collection, the CD ratio of banks has also fallen to 80.36 percent. According to the provision of the central bank, commercial banks can give loans by maintaining a CD ratio of up to 90 percent. As per this provision, banks now have the capacity to provide additional loans of Rs 578 billion.

According to a report prepared by NRB, the remittance inflow has increased by 26.4 percent and reached Rs 477.96 billion as of mid-November of the current fiscal year. Similarly, during this period, income from tourism activities also increased by 47.2 percent and reached Rs 25.74 billion. The increase in government spending also had a positive effect on the growth of bank deposits.

The central bank has already reduced policy rates to increase credit flow through the first quarterly review of the monetary policy. In the current year, loan disbursement is projected to increase by 11.5 percent, but it has only increased by 4.8 percent by mid-November.

The central bank has mentioned in the monetary policy review that the growth of deposits is satisfactory and interest rates are decreasing, so credit expansion will improve by the end of the current fiscal year.

Along with the reduction of the policy rates by the central bank, BFIs have also reduced the interest rates on deposits and emphasized on increasing credit flow. With excess liquidity, interbank and short-term interest rates have also fallen to a low point. On Thursday, the interest rate of interbank transactions remained at 2.62 percent.

When the interbank interest rate fell below 1 percent in mid-November, the central bank mopped excess liquidity through deposit collection tools. As of Sunday, the NRB has raised Rs 137.25 billion from the market by issuing deposit collection tools 10 times. Of that, Rs 75 billion has matured and returned to the market.