Nepal Rastra Bank (NRB) is planning to bring ‘tight monetary policy’ for Fiscal Year 2015/16 to mop up excess liquidity from the market.
The first monetary policy, after Chiranjibi Nepal assumed the post of Governor of NRB on March 19, is likely to introduce tightened monetary policy as the banking system is grappling with excess liquidity for the past one and half years, according to a central bank official.
The banking system has liquidity surplus of around Rs 100 billion, according to NRB.”
“The central bank is increasing the statutory liquidity ratio (SLR) and cash reserve ratio (CRR) by one percentage point and 0.5 percentage point, respectively, for ‘A’ class commercial ban”s,” the official told Republica, requesting anonymity.
He, however, said that the meeting to be held on Thursday morning will finalize the Monetary Policy.
CRR refers to the portion of deposits that a bank has to park in the central bank’s vault in cash, while SLR is reserve requirement that a bank has to maintain in the form of cash, gold or other government approved securities.
At present, commercial banks are required to maintain SLR of 12 percent and CRR of 6 percent. Hike in SLR and CRR requirements mean that the banks will have to park their additional cash and liquid assets at the central bank’s vault.
According to a data, commercial banks have total deposits of Rs 1,430 billion as of July 10. If the central bank increases CRR by 0.5 percentage point, a total of additional Rs 7.15 billion will go into the vault of the central bank. The increase in SLR and CRR will restrict the banks’ leverage in pumping more money into the economy. Higher the ratio, the lower is the amount that banks will be able to use for lending and investment.
According to monetary experts, the slight increment in the CRR and SLR, however, is unlikely to increase interest rates for borrowers in the current banking situation which is flushed with excess liquidity”
“Even if the central bank raises CRR and SLR by 0.5 or 1 percent in the current context, it won’t make much impact on the capacity of the banks to float loa”s,” Bhuvan Dahal, CEO of Sanima Bank, told Republica.
Likewise, bankers are also expecting a roll back of some of the earlier decisions made by the NRB under former Governor Yubaraj Khatiwada. Nepal Bankers Association (NBA) has already requested NRB to scrap its directive that bars BFIs from electing, nominating or appointing any board member, chairman or CEO for more than two consecutive terms. Presenting its suggestions to the upcoming Monetary Policy 2015/16 and Unified Directives recently, NBA had urged the central bank to remove such restriction altogether, reasoning that such provision contravenes with the Bank and Financial Act 2063.