The banking sector is awash in cash with excess liquidity surpassing Rs100 billion as deposits swelled due to an increase in the inflow of remittance and lending stopped following the April 25 earthquake, Nepal Rastra Bank (NRB) said.

According to the central bank, this is the first time in history that excess liquidity in the country’s banking system has crossed Rs100 billion.  As of Sunday, banking system has an excess liquidity of Rs109 billion, the NRB said.

Although interest rates are expected to drop due to the massive amount of extra cash, the state of affairs also points to a slowdown in economic activities.

According to the Nepal Bankers’ Association (NBA), lending by commercial banks during the period May 1 to June 5 amounted to a mere Rs3 billion against a sharp rise in deposits of Rs56 billion.

“Following  the earthquake, there is virtually no demand for loans from customers,” said NBA President Upendra Poudyal. “Considering the risk, we have also been assessing the damage to collateral before extending additional loans to borrowers, particularly home loans.”  Since the earthquake, there has been a massive rise in remittance into the country which contributed to pushing up deposits.

According to NRB, it collected foreign exchange worth Rs53 billion from commercial banks from mid-April to mid-May against the average collection of Rs30 billion in previous months.

“There has been a 15 percent rise in the remittance inflow through our banks after the quake,” said the Ashoke Rana, CEO of Himalayan Bank.  

Despite a record high level of excess liquidity, banks have not yet lowered their interest rates. Instead, they have been criticized for hiking the rate citing risks caused by the earthquake.

Poudyal rejected the charges saying that banks had to keep interest rates at a high level as they were paying a higher rate of interest on deposits just before the earthquake. “It will take some time for interest rates to come down, but it will happen,” he said.

While the general public is not getting loans at a lower interest rate, banks and financial institutions have been forced to buy treasury bills and other debt instruments of the government at a much lower interest rate due to the high level of excess liquidity.

For example, the interest rate on the 91-day treasury bills issued recently is just 0.34 percent. Likewise, the interest rate on development bonds is a mere 3.08 percent.

On the other hand, the government’s treasury holds around Rs80 billion as it has been struggling to boost spending on development projects.

At the same time, it has been asking for huge funding from donors.  “Spending by both the government and the private sector has stopped which is bound to bring down economic growth,” said a senior NRB official.  

In view of the steep slump in economic activities, the Central Bureau of Statistics (CBS) has scaled back its economic growth forecast to 3.04 percent from 5 percent.  

The CBS has made a downward revision of almost all the sectors following the quake in comparison to its pre-quake projection. Construction, real estate, hotels and restaurants, agriculture, mining, manufacturing, finance and education are among the worst hit sectors.  

source: PRITHVI MAN SHRESTHA, the kathmandu post,16 june 2015