The central bank has said that uncompetitive market practice has forced Nepal Rastra Bank to step in the market and fix spread rate.

The central bank has asked the commercial banks to bring down their spread rate to below five per cent within current fiscal year.

“The central bank fixed spread rate as the market failed to function in a competitive manner,’ said the central bank governor Dr Yuba Raj Khatiwada, addressing the 59th anniversary of the Nepal Rastra Bank, here today.

“The market needs correction of its shortcomings,” he said, adding that the regulatory body will step in if it does not correct itself. “Cap on spread rate is the result of the uncompetitive practice in the market.”

The central bank has brought concept of floor and ceiling to avoid the volatility in the financial market that saw liquidity crunch and liquidity surplus due to significant gap between interest rates on deposits and lending.

The regulator is closely watching the progress in spread rate,” Khatiwada said, adding that it is the regulator’s responsibility to see market function practically.

Referring to the recommendation of donor agencies on the spread cap, he said that the central bank is well aware of the market rather than the donors.

However, he said that the central bank is not introducing any long-term instrument to mop up excessive liquidity in the market and keep on trying the except the short-term instruments like reverse repo. “The central bank is not in favour of tightening the monetary policy – as as it could constrain economic growth – despite liquidity surplus in the banking system, as the market has witnessed a volatile liquidity situation in the past years.

The central bank has used a short term monetary instrument – reverse repo – for 16 times since September – to mop up excess liquidity from the market

Likewise, tightening the monetary policy could hike cash reserve ratio (CRR) and statutory liquidity ratio (SLR) that could curb banks and financial institutions’ lending capacity.

Governor’s assurance means the central bank is not planning to hike cash reserve ratio (CRR) – the portion of total deposits that banks and financial institutions must park at the central bank – statutory liquidity ratio (SLR) – mandatory investment that banks and financial institutions have to make on government securities like bonds and treasury bills – anytime soon to manage the surplus liquidity.

The financial sector has been facing a problem of excess liquidity since beginning of the current fiscal, also due to increased in remittance income and second Constituent Assembly (CA) election. Currently, banking sector has excess liquidity of around Rs 50 billion.

Addressing the anniversary, former governor of the central bank Bijaya Nath Bhattarai said the central bank should adopt forward looking supervision approach.

Likewise, deputy governor Gopal Prasad Kaphle, on the occasion, said that cracking whip on inflation, managing liquidity surplus, expanding financial service to rural areas and increasing investment in energy and other productive sectors are key challenges for the central bank.
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