Economy

Banks facing acute liquidity shortage

Published by Octron on December 8, 2009

The country’s banking system is facing an acute shortage of liquidity. Commercial banks took standing liquidity facility (SLF), an urgent liquidity facility that the central bank provides them, at 12 percent interest on Monday.

The banks received liquidity from other banks (inter-bank lending) at the interest rate of more than 11 percent. The banks were forced to pay high interest due to shortage of liquidity in the banking system and it will increase the interest rate of lending too.

As institutional investors withdrew money from banks and people’s investment in gold went up, the banking system faced a liquidity crunch. According to Nepal Rastra Bank (NRB), the interest rate against SLF remained at 12.34 percent and the inter-bank interest rate remained at 11.8 percent this week. “The increased collection of money by the cooperatives may also be one of the reasons behind the liquidity crunch,” a banker said.

NRB Executive Director Lila Prakash Sitaula said that the there was a liquidity shortage of Rs. 3.58 billion in the banking system. “The banking system gets affected if it faces ups and downs of liquidity by Rs. 5-7 billion.”

The banking system has been facing liquidity crunch for the last three-four months. Earlier, it presumed that the liquidity crunch was observed due to the failure of budget endorsement by the parliament but the situation

has not improved although the budget is being spent. “It is a matter to be worried about,” said another NRB official.

It seems that investors were attracted to invest in gold. About 5 kg of gold used to be sold two months ago and now the average daily sale of gold has reached 13 kg. It means an additional Rs. 22.4 million is being invested in gold daily against the earlier average transactions.

The central bank renewed four types of treasury bills ranging from 28, 91, 182 and 364 days respectively on Monday. The Agricultural Development Bank got repayment of Rs. 50 million against 28-day treasury bills worth Rs. 500 million.

Source: Kantipur

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