Currently, excess liquidity in the banking system has dipped to around Rs 11 billion from around Rs 40 billion in mid-July 2012 when the fiscal year began. Most of this money gradually made its way to Nepal Rastra Bank (NRB) as the amount hoarded by the central bank topped Rs 43.61 billion in the first half of the fiscal year to January 13 from Rs 10.99 billion last mid-July.[break]
“The portion of excess liquidity is shrinking fast while huge amount of cash is sitting idle at the central bank because the government has not ramped up capital spending,” Sashin Joshi, CEO of NIC Bank, told Republica.
The government´s capital expenditure stood at Rs 7.04 billion, or 13.71 percent of the amount allocated for the purpose, in the first six months of the current fiscal. The government was not able to spend money on development projects this year, as many ministries were provided with inadequate funds because of failure to introduce a full budget. The problem further worsened after many ministries were told to prepare capital spending plans after allotting enough funds for salary and other recurrent expenditure.
Low capital spending, on one hand, has affected state-led development activities, such as construction of infrastructure projects, while on the other constrained money supply as the government is the biggest spender in the country.
This has hampered the deposit collection process of banks and financial institutions.
In the first half of the fiscal year, a total of 32 commercial banks were able to raise their deposit base by only Rs 38.21 billion. In contrast, they provided Rs 72 billion in loans in the same period.
“Because of low inflow of deposits and rapid expansion of credit, liquidity management is becoming more challenging for banks and financial institutions,” Joshi said. “If the situation persists for some more time, many banking institutions may start thinking twice prior to providing loans.”
A snapshot of looming problem, as indicated by Joshi, could be seen from the manner in which coupon rate on 91-treasury bill and average inter-bank lending rate are going up. On Tuesday, both the rates were hovering at around two percent as against less than 0.5 percent of mid-July.
The manner in which commercial banks are withdrawing funds parked at Nepal Rasta Bank (NRB), the central monetary authority, also shows banks are gradually finding themselves short of cash.
Commercial banks, which had stashed Rs 100.13 billion at NRB till mid-July 2012, now have only Rs 51.66 billion left at the central bank´s vault, which is little more than around Rs 49 billion required to meet the regulatory cash reserve ratio requirement. In the same period last year, commercial banks had held Rs 64.06 billion at the central bank.
“Although the situation is worse this year, most of the banks find themselves in a tight position during this season as businessmen have to settle 40 percent of the annual tax bills around this time of the year,” Joshi said. “But again, the situation may become worse if the government does not begin spending money,” Joshi said.
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