Deposits Of BFIs Surges While Credit Shrinks
July 1, 2020 | Investopaper
While the deposits of commercial banks increased by Rs 113 billion since Chaitra, 2076, the credit flow has decreased by Rs 36 billion. Deposits in banks and financial institutions had increased after the economic activity came to a standstill in the lockdown.
As of last Chaitra, the total deposits of commercial banks stood at Rs 3.189 trillion. It has increased to Rs 3.32 trillion. Likewise, the credit flow of banks until Chaitra was Rs 2.845 trillion.
As there is no demand for new loans, there is an excess liquidity in banks and financial institutions. The government expenditure and remittances have increased as compared to the previous month but there is no demand for loans. As of June 29,2020 banks and financial institutions have about Rs 108 crore in excess liquidity, according to NRB data. This amount is in addition to the mandatory cash reserve (CRR). Banks and financial institutions can invest all these amounts in the form of loans.
The interest rate (interbank rate) of transactions between banks and financial institutions is less than one percent due to sufficient liquidity. Also in the past, demand for credit from banks and financial institutions had declined due to the crisis and epidemic. When demand is low, more liquidity accumulates in the financial system. This lowers interest rates. At this time, the interest rate on deposits is much lower than on loans. The situation was similar after the 1972 earthquake and the blockade imposed by India. Banks and financial institutions refused to accept additional deposits due to high liquidity.
The average CCD ratio of banks and financial institutions is around 72-73 percent. This also shows that banks and financial institutions have a lot of credit flow capacity.
NRB has provided additional 10 percent loan facility to the customers whose business has been affected due to COVID-19. The bankers have said that the customers have demanded the loan using the same facility for the principal and interest to be paid in Ashad end rather than for the new business.
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