Central bank says more deposits, less loans, sign of improving liquidity

Nepal Rastra Bank officials said the gap between deposits and credit, which has led to the current shortage of loanable funds in banks and financial institutions, has turned towards a correction.

According to them, this is reflected in the reverse trend of deposit collection and credit expansion in the third week of December. Banks and financial institutions have collected 116 billion rupees in deposits through December 21 since the start of the 2021-2022 fiscal year in mid-July. During the same period, credit reached 438 billion rupees.

But, this trend was completely reversed in the week of December 16-21, according to the central bank, as banks and financial institutions collected 27 billion rupees in deposits and extended credit of 7 billion rupees.

“The latest data shows that the trend of expanding deposits and credit has reversed,” Prakash Kumar Shrestha, head of the economic research department at the central bank, said during a meeting in Kathmandu on Wednesday.

Central bank officials said recent moves to control imports and the central bank’s pumping of liquidity into the banking system would also help balance deposit credit growth.

As the country’s economy recovers from the disastrous effects of the Covid-19 pandemic, demands for credit have increased for importing goods.

With banks and financial institutions lending excessively to finance imports, this caused a liquidity crisis in the banking system and this crisis was compounded by the failure of the government to make capital expenditures.

Now the government and the central bank have taken a number of steps to rectify the situation, with the central bank injecting liquidity into the banking system through repurchases, overnight reverse repurchases and reverse repurchase agreements. ‘outright purchases and refinancing facilities. The government has also allowed banks and financial institutions to account for 80 percent of funds owned by local governments as deposits in order to reduce the credit-to-deposit ratio.

The repo is a monetary instrument whereby the central bank buys securities from banks and financial institutions while providing them with funding, while the overnight repo is a short repo.

The central bank also requires importers to deposit 100 percent cash in banks to open the letter of credit for importing certain goods the government wants to discourage from importing.

Central bank governor Maha Prasad Adhikari said the measures were taken as short-term solutions to deal with the liquidity crisis. “Our preparations are underway for medium and long term strategies to deal with the recurring liquidity crisis in the banking system,” he said.

While the increase in import financing has resulted in a shortage of liquidity in the banking system, the country is also suffering from a huge balance of payments deficit and declining foreign exchange reserves.

The balance of payments, which refers to the balance between money leaving the country and money entering, slipped to a deficit of 150.38 billion rupees in the first four months of the current fiscal year and while gross foreign exchange reserves fell by 11%. percent to Rs1244.85 billion in mid-November from mid-July, according to the central bank.

Current foreign exchange reserves would be sufficient to import goods and services for 7.2 months, according to the central bank.

But, central bank officials said they noticed signs of depletion of foreign exchange reserves as early as April. But the central bank did not intervene even through the monetary policy for the current fiscal year 2021-22 released in mid-August, about a month after the start of the fiscal year.

Experts have sounded the alarm on the state of the economy, saying the current deterioration in economic indicators along with the potential fertilizer crisis and the potential spread of the Omicron variant could cause economic catastrophe.

However, central bank officials argue that they have not stepped in to help economic activities thrive after the Covid-19 pandemic and have also paved the way for the economy to self-correct.

“Sometimes the economy corrects itself as part of a cyclical model. But if that doesn’t happen, we have to intervene politically, ”Shrestha said.