April 11: The Bhutan National Bank (BNB) is facing a cash liquidity crunch because of large withdrawals in form of loans and advances in 2007.

Since 2005, the BNB has been facing a liquidity crunch. This is because the withdrawals have increased from Nu. five billion in 2006 to Nu. seven billion in 2007.

The Managing Director of BNB Kipchu Tshering said the deposits have however remained the same at Nu. eight million.

The liquidity crunch has aggravated when the Royal Monetary Authority (RMA) tightened its monetary policy last year. This was done because the increase in loans and advances has fuelled the demand for Indian rupee.

A RMA official said 90 percent of the loans are converted into Indian rupees as most of the goods are imported from India which has fueled the demand for Indian rupees. The rupee reserve at the RMA was negative before September last year.

RMA tightened its monetary policy by using tools like cash reserve ratio which was increased from 13 percent to 15 percent. The cash reserve ratio is the percentage from the deposits that is maintained with the central bank. It also announced higher interest rates for RMA discount bills.

The BNB increased the interest rates for deposits starting from this month to encourage the public to deposit money. However the BNB Managing Director said if the deposits fail to increase, the bank will curb the personal and housing loans.