The reason behind the decline in interbank rate is excess liquidity in the financial system.
Despite the central bank has kept the policy rate at 7 percent, the interbank rate has declined excessively which has aroused difficulty for NRB to maintain an interest rate corridor.
Two weeks earlier, when the interbank rates fell nearly to 2 percent, NRB tried to maintain an interest rate corridor by issuing reverse repo twice a week. The banks failed to maintain the interbank interest rate based on the interest rates corridor despite repetitive liquidity mop-up by NRB.
The central bank mop up excess liquidity when the interbank interest rates decline 2 percent below the policy rate. The central bank is under huge pressure to bring down the policy rate in the upcoming Monetary Policy since it is failing to bring the interest rates within the limit of the interest corridor despite multiple liquidity mops up.
Similarly, the CD ratio of the banks is falling due to stagnant loan extensions. As per NRB data, by July 6, the average CD ratio of the banks has been maintained at 82.88 percent. the banks are required to maintain their CD ratio at 90 percent. The CD ratio of a few banks has dropped down to 70 percent by the review period.
Increasing deposits and stagnant loan extensions have dumped nearly Rs 350 billion in investable money in the banks.
The excess liquidity that the banks failed to invest will increase expenses for banks as they will have to give more interest to the deposits than the interest they receive from loan extensions. It will have a negative effect on the income of the banks.
