Economy

Liquidity crunch hits commercial banks

Published by Octron on April 15, 2010

The liquid assets of the commercial banks in the first seven months of the current fiscal year declined substantially by 10.4 per cent to Rs 168.5 billion against the growth of 3.4 per cent in the same period last year, according to the central bank. “Of the components of liquid assets, liquid fund declined by 11.6 per cent in contrast to an increase of 11.8 per cent in the same period last year,” said the Nepal Rastra Bank (NRB), in its current macroeconomics report based on the first seven months of the current fiscal.

However, the central bank attributes such a contraction of liquid funds of commercial banks to the decline in commercial bank’s balance with the NRB and balance held abroad. The central bank is also concerned about the aggressive lending by commercial banks. The higher growth of commercial bank’s credit relative to their deposit mobilisation changed their liabilities/assets structure by increasing the credit-deposit (CD) ratio to 91.3 per cent in mid February 2010 from 81.2 per cent in mid July 2009. When the CD ratio goes overboard, the banks would find it difficult to pay the account holders.

On the other hand, the liquidity-deposit ratio declined to 29.5 per cent in mid-February 2010 from 34.2 per cent in mid-July 2009. NRB, on the other hand, injected net liquidity amounting to Rs 53.9 billion during this period and mopped up Rs 7.4 billion and Rs 1 billion through outright sale auction and reverse repo auction respectively, while Rs 58.9 billion and Rs 3.4 billion were injected through repo and outright purchase auction respectively.

“In the same period last year, net liquidity amounting to Rs 16.7 billion was mopped up,” the central bank said, adding that of the total liquidity mopped up, Rs 7.5 billion and Rs 13.2 billion were mopped up through outright sale auction and reverse repo auction respectively, while Rs 4 billion was injected through outright purchase auction.

Similarly, NRB also injected net liquidity amounting to Rs 46.2 billions through net purchase of $611.5 million from commercial banks. A net liquidity of Rs 85.3 billion was injected through the net purchase of $1.1 billion in the same period last year.

The NRB purchased Indian currency (IC) equal to Rs 58.1 billion through the sale of $1.2 billion in the Indian money market. “Indian currency equal to Rs 40.2 billion was purchased through the sale of $850 million during the corresponding period last year, the NRB said, attributing a higher volume of Indian currency purchase to an accelerated trade deficits with India.

Source: THT

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