LOCAL NEWS THE RISING NEPAL (DAILY)

Market shows little impact after revised CRR

By Rajkumar K.C.

KATHMANDU, Sept. 4: Nepal Rastra Bank's move to inject Rs 1.75 billion to create extra liquidity in the banking system, by whittling down the compulsory Cash Reserve Ratio (CRR) since July 17, has failed to generate a 'visible impact' in the money market until now.

The CRR that was cut down by one percentage point has neither induced investments nor created any economic activities, say economists, although it might be too early to form an opinion about the new policy.

They say - the NRB's policy of creating extra liquidity to support investment in the needy areas has so far failed.

However, Governor of NRB Dr. Tilak Rawal while announcing the new monetary policy on July 15 had affirmed that with the reduction of the CRR, the cost of fund would decline and enable commercial banks to provide more soft loans.

The amount of liquidity until the second week of July was Rs 39 billion, which, according to NRB officials, 'was not sufficient to rejuvenate' the ailing economy. Therefore, the NRB had trimmed down the CRR for the second time in six months in order to pump up more liquidity.

The NRB had already slashed the CRR by one percentage point in early January with the objective of inflating the size of the liquidity. "But that also could not make any significant impact on the economy. Despite the claim by the NRB, the slashed CRR has also failed to make any visible impact," said Prof. Guna Nidhi Sharma.

Prof. Sharma does not see any positive impact on the money market following the scraping of the spread rate in commercial banks.

Said he, "The NRB has to review its policy as to why the slashing of the CRR has failed to trigger any effect."

According to ' the Banking Operation Department' at Nepal Rastra Bank (NRB), there has been no change in the liquidity at all. The amount of liquidity in the market is around Rs. 39 billion.

"There is no liquidity problem. Many banking and financial institutions are still looking for avenues to invest. They already had excess money to invest. So the CRR was cut down in imitation of the Federal Reserve Bank of India," said former acting vice chairman of the National Planning Commission (NPC) Dr. Raghav Dhwoj Pant.

The NRB Act 2058 has clearly elaborated the NRB's function, according to which it is entitled to maintain price stability and improve the balance of payment (BoP).

The NRB, the central authority of the monetary system, had, thus, introduced a new policy to bring significant change in the country's monetary system.

On the one hand, the BoP has recorded a deficit. Despite modest growth in deposits, a sluggish credit demand has led to a decline in the interest rate of the treasury bills and in the inter-bank market. On the other hand, the market has failed to respond to the changes due to non-economic factors.

Dr. Yuba Raj Khatiwada, executive director of Research Department at the NRB also admitted that the revised CRR has failed to generate an impact. "It is too early to make an opinion about the new policy as last month's data have not been received from various banking institutions."

He said the liquidity position is as comfortable as before. Asked, to what extent the banking system has been influenced by the action of the Commission for the Investigation of Abuse of Authority (CIAA), Dr. Khatiwada said, " No remarkable incidence has taken place so far."

It is said that the tendency of withdrawing deposits from various banks is on the rise following the CIAA's move. There is a thin possibility of capital flight and the possibility of hoarding money cannot be ruled out.

Regarding the impact of the revised CRR in the money market Narendra Kumar Bhattarai, president of the Nepal Bankers Association, said that Rs. 1.75 billion is a small amount to make a significant change in the market.

According to the NRB, domestic credit of the banking system has registered a slower growth of 9.1 per cent, that is Rs 17.04 billion till mid-July. Besides, the banking sector's credit to the private sector has gone down to 5.9 per cent from 15.8 per cent. Similarly, broad money supply has declined to 5.5 per cent from 15.2 per cent while narrow money growth has also slowed down.

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