The central bank has started wondering whether the problem of liquidity crunch in the country’s banking system is as worse as stated by banks and financial institutions, as the auction it held to inject funds received unenthusiastic response.

The Nepal Rastra Bank (NRB) on Tuesday floated money market instrument called outright purchase auction to inject Rs40 billion into the banking sector for a period of six months. A total of seven banks took part in the auction proposing to acquire Rs9.6 billion.

“But of these banks, only one-Standard Chartered Bank Nepal-walked off with Rs1.5 billion, as interest rates proposed by others were not appropriate for today’s auction,” NRB Spokesperson Narayan Prasad Paudel said.

The NRB had fixed cut-off rate for Tuesday’s auction at 3.74 percent based on Monday’s weighted average interbank rate of commercial banks. “Standard Chartered proposed four different rates between 3.78 percent and 3.89 percent, while others offered rates below yesterday’s average interbank rate and thus could not acquire funds,” Paudel said.

This means only 3.75 percent of funds up for grabs were taken away during Tuesday’s auction.

“Such a lukewarm response indicates whether banks are really facing liquidity crunch as they have reported to us,” said Paudel.

The response was same when NRB on January 6 floated two-week repo with a fixed annual yield of 4.8753 percent. At that time, Rs20 billion was extended to banks and financial institutions. But banking institutions took away only Rs1.9 billion.

Bankers, on the other hand, say this kind of money market instrument launched by the central bank will barely help them.

“A repo launched by NRB will definitely inject funds into the market,” Anil Shah, president of the Nepal Bankers’ Association, recently said. “But this money can only be used to maintain the cash reserve ratio and statutory liquidity ratio, which is not our need at the moment as the banking sector is facing a shortage of funds that can be extended as loans.”

Banks currently have to maintain a liquidity ratio of 20 percent, meaning 20 percent of the total deposits, among others, have to be invested in securities like repo, treasury bills and bonds or deposited with the central bank. “Most banks have been maintaining this ratio,” said Shah. “What they are looking for is a solution that can increase the stock of funds that can be issued as loans to borrowers.”

Banks are currently allowed to convert 80 percent of their deposits into loans. This means that for every Rs100 collected in the form of deposit, only Rs80 can be extended as credit. This, in technical terms, is referred to as credit to core capital-cum-deposit (CCD) ratio, which should stand at a maximum of 80 percent.

Since deposit flows have slowed down lately, the CCD ratio in some banks has exceeded the 80-percent mark, according to NRB officials. To resolve this issue, banks need to raise fresh deposits or increase the core capital, they said.