Cash crunch eases; borrowing rate likely to come down

Nearly three-month long liquidity crunch eased Sunday after the Nepal Rastra Bank (NRB) pumped a huge amount of capital, bringing down the short-term central bank lending rate to 7.41 percent on average from last week´s 12.42 percent.

The central bank issued largest-ever repo -- lending by central bank against government bills owned by banks -- worth Rs 10 billion after the liquidity crunch scaled up to a new high last week, pushing interbank lending rate to record 14.5 percent. With the latest improvement in liquidity -- cash available with banks for immediate investment -- a flicker of hope has appeared that recent escalation seen in the borrowing rates -- particularly realty and auto loans -- will cool down.

According to NRB officials, the maximum rate offered by financial institutions for the repo issued on Sunday was 10.5 percent whereas the lowest was around one percent. Given the wide variation, the central bank enforced cut-off rate at 6 percent and it released Rs 5 billion -- half of the offered amount -- on Sunday´s auction at an average rate of 7.41 percent, according to the official.

"Given the amount that was demanded and the rates that were offered by the financial institutions, it is now clear that the actual shortage of liquidity was much less than what many had expected," said Lila Prasad Sitaula, executive director of NRB. The latest step of NRB has come after the earlier injection, amounting Rs 15 billion, failed to satisfy market demand of liquidity.

It seems that the latest issuance will be enough to put positive impact on increasing interbank lending rate -- a barometer to gauge the gravity of liquidity crunch," said Sitaula and added that the central bank will closely watch the market situation on Monday and take decisions on whether or not to release more repo.

Central bank officials are also optimistic that the new provision of 40 percent cash margin requirement while issuing Letter of Credit to import gold will also help in easing the liquidity shortage. The new provision will discourage gold investors with speculative motive thus forcing financial institutions to deposit foreign currency in the central bank rather than financing imports which will help additional injection of liquidity into the economy, said an official.
Source:Republica