Banks Demand Permanent Liquidity Facility

April 27: With the decline in excess liquidity faced by banks and financial institutions (BFIs) till few months back, BFIs are demanding permanent liquidity facility.  “Some commercial banks were provided with Rs 5.13 billion permanent liquidity facility from April 8-19,” informs Dr Chiranjibi Nepal, Governor of the Nepal Rastra Bank (NRB) amid a program organised to mark 61^st anniversary of the central bank on Tuesday.

The facility is a loan facility provided to the banks on collateral of bonds, debentures and treasury bills issued by the NRB.  Banks are required to pay eight percent interest rate on NRB provided loan facility. It has signalled on gradually decreasing ‘liquidity tight’ and lower capital levels in the banking system. However, the demand by banks in the exact time when the excess liquidity is coming under control seems contradictory, analysts say.

NRB informs of mopping up Rs 472 billion liquidity from banking system as of mid-July 2015 to 22 April 2016. “In compare to the mopped up liquidity, permanent liquidity facility demanded by the banks is negligible,” says a NRB source.

“The banks might have required the capital due to stagnant banking investments in treasury bills as well as increase in loan demands,” says the source. The banks are also tends to take the facility in a bid to achieve capital adequacy ratio designated by NRB.

Increase in inter-bank interest rate also shows the condition of ‘liquidity tight’ in the banking system. The interbank interest rate has risen to 5.15 percent on Sunday which had averaged 3 percent in first week of April. Due to this, it is estimated that the increase in loan interest rates will attribute to the increase in deposit interest rates.

Similarly, NRB informs of issuing high quality notes within the next one month. In the first phase, notes of Rs 100 will be issued. In the program, former governors were honoured by the NRB.