Mopping up excess liquidity

Through more economic activities will the govt. endeavour to create demand for loans

Banking: The government wants to create demand for loans by increasing economic activities, if there is excess liquidity in the financial system.  The statement comes in the backdrop of banks claiming that they are holding cash above the usual requirement.

Prime Minister Tshering Tobgay has said there is excess liquidity, if the recent raise in the cash reserve ratio (CRR) was triggered by accumulation of excess cash in the financial system.  He was speaking at the meet-the-press on Friday in Thimphu.

The Royal Monetary Authority (RMA) recently revised the CRR from 5 percent to 10 percent.  A central bank raises the CRR to mop up excess liquidity in the financial system, and lowers the CRR as the banks experience liquidity crunch.

CRR is a specified minimum portion of the total deposits, which commercial banks have to hold as reserves with the central bank.  The RMA had brought down the CRR to 5 percent from 20 percent, when the banks experienced an extreme liquidity crunch in 2012.

The prime minister said the economy has to be vibrant. “The government doesn’t want the banks to be bearing the brunt of holding on to excess money.”

The government injected Nu 2.2 billion into the financial system in April 2014 to help them stimulate the economy, at a time when banks were facing a severe liquidity crunch.

A bank official said lending has slowed down, while deposits have been increasing.  He attributed the slowdown in lending to a lack of enough economic activities taking place in the country.

If the issue was going to affect the economy, the prime minister said the RMA would either address it on its own, or inform the government to take fiscal measures.  He said such fiscal measures would be aimed at complementing the monetary measures to address the “potentially dangerous situation”.

The prime minister said the RMA would have to inform the government, so that the government and the central bank would work together to resolve the issue.  However, unless the RMA appraised the government, it could not take a unilateral decision, he said.

Last week, the government also issued treasury bills (T-bills) worth Nu 3 billion.  This, some believe, is an indication there is excess liquidity in the market, which the government wants to mop up.

By MB Subba

 

2 replies
  1. Development practitioner
    Development practitioner says:

    Slapdash pendulum swing! Earlier banks encouraged subprime lending in millions mortgaging ancestral rural land to construct urban buildings (with Prados on the fringes?), but now they want SWOT analysis and proper mortgage for projects with more than 8% FIRRs. Isn’t high liquidity and FX reserve increase a sign of over private indebtedness, distortionary financing, fiscal policy & regulatory paralysis, and resultant private sector hold up?

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