Kathmandu. Nepal’s banking system is now full of liquidity. However, investment opportunities are declining.
According to the latest data released by Nepal Rastra Bank, the total deposit amount of commercial banks, development banks and finance companies has reached Rs 7.475 trillion. However, the total loan disbursement during the same period was limited to Rs 5.635 trillion. This shows that there is plenty of liquidity in the banking sector at present, but new investment projects are slow.
According to the statistics, commercial banks have collected deposits of Rs 6.717 trillion and disbursed loans worth Rs 5.12 trillion. Similarly, development banks and finance companies collected deposits of Rs 758 billion and extended loans of Rs 623 billion. During this period, the deposit-loan ratio (CD ratio) of the banking sector was limited to 74.25 percent. That’s well below the regulatory threshold of 90 percent. This shows that the banking system still has the capacity to lend more than Rs 7 trillion.
However, the problem is now focused not only on the supply of credit but also on the demand. As the number of new industries, trade and investment projects in the market decreases, the money deposited in banks has remained idle. This is the reason why there is a situation of ‘excess liquidity’ in the banking sector.
The central bank has been using various monetary instruments to control the situation of excess liquidity. These include deposit collection equipment and permanent deposit facilities. Through these mechanisms, banks have deposited more than Rs 8 trillion in the central bank.
Due to excess liquidity, interest rates have also come down in the interbank market. According to the Nepal Rastra Bank, the interest rate on interbank transactions has come down to 2.75 percent in the first week of the current fiscal year. In the same period last year, the rate was above 3 percent. This shows that there is plenty of money in the market, but the opportunities for investment are limited.
As liquidity has increased, the average base rate of banks has also decreased. According to the NRB, the average base rate of commercial banks fell to 5.72 percent, development banks to 8.09 percent and finance companies to 8.77 percent in August 2022. In the previous year, it was 7.49 percent, 9.15 percent and 10.65 percent respectively.
The main challenge now is that even if the interest rate has come down, the investment has not been expanded. Businesses and industrialists are holding back new investments due to political uncertainty, legal ambiguity and a drop in consumption demand. This has created a conflict of monetary balance in the banking system. There is a lot of money, but it is not being used productively.
According to experts, if this situation continues for a long time, there is a risk that the economy will slow down and the imbalance in the financial system will deepen. “The challenge now is not only in monetary policy but also in improving the investment climate,” they say. ’
Experts are of the opinion that this idle liquidity can be diverted to productive sector only through cooperation among the government, private sector and financial institutions.
