Banks have run out of liquidity after the shutdown. The amount to be invested in banks is not lacking, it has become excessive. According to Nepal Rastra Bank, the banks have accumulated more than Rs 139 billion in liquidity at present.

NRB spokesperson said that there was more liquidity in the banks after the decline in banking investment due to the lockdown. Gunakar Bhatt explains.

The number of people going to the banks for loans is very low.

The government carried out a complete shutdown on April 26 to prevent the spread of the corona virus. Credit investment was very low during the lock-down period. The government has changed the modality of lock-down and made it easier since June 20. However, even during this period, credit investment has declined instead of increased. The slowdown in credit investment has led to more liquidity in banks.

Excess liquidity also has a negative impact on the economy. If the deposits in the banks increase but the loans do not increase, then the interest expenses of the banks will increase and the profits will be affected.

As a result, banks start lowering interest rates on deposits and depositors are affected. On the other hand, interest rates on loans also go down, but in the absence of an investment-friendly environment, the demand for loans cannot increase and investment begins to flow to unproductive sectors.

Due to high liquidity, there is a low return on savings in the country, which creates a situation of capital flight. Similarly, low interest rates in banks lead to deposits in institutions such as cooperatives which are far from supervision and monitoring, which leads to financial risk.

At the same time, its effect on deposits has already begun. Some banks have already reduced interest rates on deposits, while others are preparing to reduce interest rates on deposits. However, the interest rate on loans has not been discussed as much as the interest rate on deposits, so it has been ignored.