Banks lending money to hosakhos; celebration doesn't boost demand

Due to their incapacity to manage liquidity, banks that are experiencing more pressure to meet loan obligations have reached this point.

Due to persistent liquidity constraints over the past two years, the bank is forced to either hold its funds at a low interest rate in the National

Bank or leave them unused within the bank.

Nepal Rastra Bank has already taken out 67 trillion 8 billion 600 million rupees from the banking system in the first two months of the current fiscal year 2081/82.

While 4 trillion 38 billion 20 million liquidity was gathered using the Bolakbol deposit collecting mechanism, 62 trillion 70 billion 40 million liquidity has been received under the permanent deposit facility.

On October 2, surplus liquidity in banks was equal to 2 trillion 29 billion 40 million rupees, despite the fact that the central bank is still conducting investigations.

The National Bank collected 11 trillion 51 billion 25 million in deposits during the most recent fiscal year, 2080–81, and used permanent deposit facilities to mobilize a total of 46 trillion 73 billion 600 million in liquidity.

Banks and other financial institutions used the 8 trillion 4.76 billion permanent liquidity facility (1.2 billion) and the 8 trillion 3.56 billion overnight liquidity facility (1.5 billion) on multiple occasions last year. As a result, net liquidity of 38 trillion 68 billion 84 billion was determined in the previous year.

Net liquidity of 54 trillion 9 billion 99 million was transferred in 2079–2080 via a variety of instruments, such as permanent liquidity facilities and open market transactions.

When there is no need for loans, there are no investing options.

The interest rate that banks receive on it is low in comparison to the cost, even though the National Bank is extracting liquidity. Banks are expanding lending, although through the swapping of other banks' loans, rather than maintaining liquidity in Rashtra Bank at low interest rates.

By the end of July 2081, Rashtra Bank's data showed that the average cost of deposits in banks and other financial institutions was 5.66 percent.

However, when deposit banks hold their deposits at the central bank, they only receive a 3 percent interest rate. Through the monetary policy it issued for the current year, the central bank has fixed the deposit collecting rate as the lower limit of the interest rate corridor at 3 percent. Permanent deposit facilities at the deposit collection rate have been made available by the regulations governing open market transactions.

When it comes to other alternative investing vehicles, the central bank has been adopting a restrictive stance. Due to increased liquidity in the banking system, banks and other financial institutions have been investing in "non-deliverable forwards" (NDF), which lower both short- and long-term interest rates.

Banks are still contributing up to 15% of their capital to NDF. The banks are required to retain the majority of their surplus liquidity reserves in the National Bank at an interest rate of three percent in such a scenario.

"More than 6 percent of income would be generated through it if the National Bank were to increase the limit of NDF," a bank's head of treasury remarked.

An NDF is a two-party contract for foreign exchange derivatives. Bhuvan Dahal, a former banker, adds that if the central bank raises the NDF ceiling, there won't be any damage to the banking industry. Investing in NDF, according to him, carries no risk.

In addition, banks are permitted to allocate thirty percent of their capital fund as a "open position" to foreign government and corporate bonds that are rated.

Limits on NDF by the National Bank are pointless, according to a banker.

In Nepal, NDF was only handled by Standard Chartered Bank until 2007. Other banks also began operations by utilizing Standard Chartered Bank's infrastructure.

The former Janata Bank lost 12 million rupees on its stake in NDF within a few years of its founding. The National Bank discontinued funding NDF after that. Subsequently, the National Bank established a threshold and a guideline for the amount of money that might be invested in NDF. Banks were allowed to invest up to 30% of their capital prior to Covid. The central bank changed it after COVID and established a 15 percent cap.

The National Bank does not need to impose any restrictions in this regard. According to the banker, banks use NDF as a short-term investment instrument when interest rates decline. "Now, when the interest rate falls, it is continuously decreasing even when the central bank is trying not to allow it to fall below a limit," the banker stated. In Nepal, banks will not make investments if demand for loans exceeds what is available in the NDF or if the interest rate on government bonds rises.

He contends that the nation will gain by permitting investment in NDF. He claimed that as a result, the banks will now pay the central bank a portion of their earnings.

In addition, banks are able to make investments in government bonds. Since the first month of the fiscal year, the government has discussed internal debt in accordance with the purpose of managing the budget's resources.

Nonetheless, it appears that the government does not prioritize the use of special mechanisms to mobilize the financial system's resources in order to increase investment in long-term projects during a period of declining interest rates.

No way to invest, debt loss is certain

According to the banks themselves, there are no investment options available to them and surplus liquidity must be maintained in the central bank at a three percent interest rate, which has resulted in a loan default crisis. In an attempt to boost enthusiasm and get over the severe disappointment with the state of the economy, the two main political parties formed a government in June of last year.

Prime Minister KP Sharma Oli and Finance Minister Vishnu Paudel assert that more investor interest and improved economic activity have resulted from the formation of the new government. Nevertheless, the economy shows no signs of recovery two months after the new government was formed.

There has been a minor increase in the import of consumer products during the past year and a half. Another banker stated, "LCs have not been opened for the import of industrial goods, but there has been a slight increase in the opening of LCs for the import of consumer goods targeted at festivals." There has never been a more disappointing two years in a twenty-plus year banking career than the past two. There is no excitement, despite the fact that it is a festival.

In the event that there is no demand for the loan, banks claim they will nevertheless approve it.

Banks and other financial institutions owed a total of 52 trillion 16 billion on August 30, up from 51 trillion 70 billion at the end of June. Mid

July had it at 51 trillion 73 billion, but in August, it had somewhat increased.

Although some loans have increased as a result of LCs issued during Dashain and the loans made by them, according to Sunil KC, President of the Bankers' Association, the demand for loans has not increased.

In June of last year, the total deposits were 64 trillion 96 billion; in July, they dropped to 64 trillion 47 billion. In August, it did, however, rise to 65 trillion 5 billion.

Former banker Dahal claims that since there is no choice for investments, banks will compete with one another, which will be advantageous to the private sector.

According to KC, President of the Bankers Association, banks with low "cost of funds" will profit from increased liquidity. According to him, it makes sense that the bank with lower costs would win out in a competition. He said that there might have been a decrease in the premium that the expensive bank was charging.

The sources claim that banks like Nepal Investment Mega, Nabil, Global IME, and others actively exchange loans from other banks, and that high-cost banks are attempting to drive away consumers by maintaining a minimal premium of 0.1 percent added to the base rate.

"According to the limit of annual credit expansion taken by the National Bank, banks should submit their annual plan to the National Bank," said the CEO of a financial institution, "Thus, the National Bank does not seem to be playing a role in controlling unnatural competition in the market by extending aggressive loans."

According to Ramu Paudel, a spokesman for Rashtra Bank, the bank will keep an eye out for unhealthful rivalry in the banking industry. He clarified, nevertheless, that the topic of loan swapping should not be referred to as unhealthy competition per the guidelines.