I would like to draw attention to a report published in this newspaper on August 18, 2016 titled “Call money rate falls to record low amid tepid demand”. The report cites a top banker who argues that high yield on national savings certificate (NSC) is one of the major reasons for excess liquidity. In this regard it is worth asking why banks should rely on government borrowing to remove their excess funds. Is that the job of a financial intermediary? If hypothetically, the government removes these instruments or links them to treasury bills, the public would simply reallocate their savings to banks. How would removing NSC reduce excess liquidity then?
If banks had lower NPL (Non-performing loan), they could bring down their spreads and lending rates and better compete with foreign lenders. Banks need to improve asset quality and the government needs to find ways to improve infrastructure and trade barriers to raise private investment – only then will excess liquidity come down in a sustainable manner.