The deposit-credit gap, which has resulted in a present shortfall of loanable funds at banks and financial institutions, has begun to close, according to officials at the Nepal Rastra Bank.
According to them, this is reflected in the third week of December’s reverse trend in deposit collection and credit expansion. Since the beginning of the fiscal year 2021-22 in mid-July, banks and financial institutions have collected Rs116 billion in deposits. Credit increased to Rs438 billion during the same period.
According to the central bank, this tendency totally reversed in the week of December 16 to December 21, when banks and financial institutions collected Rs27 billion in deposits and provided Rs7 billion in credit.
“Recent data reveal that the deposit and credit expansion trend has reversed,” said Prakash Kumar Shrestha, chief of the central bank’s economic research department, during a press conference in Kathmandu on Wednesday.
Officials from the central bank indicated that recent actions taken by the central bank to limit imports and pump liquidity into the banking sector will aid in balancing deposit-credit growth.
As the country’s economy recovered from the devastating effects of the Covid-19 outbreak, demand for borrowing to import goods increased.
With banks and financial institutions lending excessively to finance imports, the banking system experienced a liquidity crunch, which was exacerbated by the government’s failure to make capital expenditures.
The government and central bank have now taken a number of steps to resolve the crisis, with the central bank pumping liquidity into the banking system via repo, overnight repo, outright purchases, and the refinance facility. To reduce the credit-to-deposit ratio, the government has also authorized banks and financial institutions to consider 80 percent of cash belonging to local governments as deposits.
Overnight repo is a short repo, and repo is a monetary tool in which the central bank purchases securities from banks and financial institutions while providing funds to them.
Importers must also deposit 100 percent cash in banks in order to acquire a letter of credit for particular items whose importation the government wants to discourage.
These actions, according to Central Bank Governor Maha Prasad Adhikari, were adopted to ease the liquidity shortage in the short term. “Our plans for medium- and long-term measures to solve the financial system’s recurring liquidity problem are in the works,” he said.
While rising import financing caused a liquidity crunch in the banking sector, the country also has a large balance of payment deficit and dwindling foreign exchange reserves.
According to the central bank, the balance of payment, which refers to the difference between money going out of the country and money coming in, fell into a deficit of Rs150.38 billion in the first four months of the current fiscal year, while gross foreign exchange reserves fell by 11% to Rs1244.85 billion in mid-November from mid-July.
According to the central bank, current foreign exchange reserves are sufficient for importing goods and services for 7.2 months.
Officials at the central bank, on the other hand, said they first observed signs of depletion in foreign exchange reserves in April. However, the central bank did not intervene in the current fiscal year’s monetary policy, which was issued in the middle of August, almost a month after the fiscal year began.
Experts expressed concern about the economy, claiming that the current deterioration of economic indicators, as well as a potential fertiliser crisis and the spread of the Omicron variety, could result in a calamity.
Officials from the central bank, on the other hand, argue that they did not intervene to help the economy recover after the Covid-19 outbreak and that they instead paved the ground for the economy to self-correct.
“As part of a cyclic pattern, the economy sometimes self-corrects. But if that doesn’t happen, we’ll have to intervene with policy,” Shrestha said.