A Development Bank Facing a Deposit Run
Janakpur National Development Bank has NPR 45 billion in deposits, NPR 38 billion in loans, and NPR 4.5 billion in liquid assets: NPR 3.0 billion in Treasury bills and NPR 1.5 billion in cash and balances with the central bank. A viral social media video falsely claims the bank has lent NPR 6 billion to a failing cooperative. In five days, depositors withdraw NPR 6.0 billion. Over the next 30 days, projected deposit outflow is NPR 9.0 billion and contracted inflows are NPR 2.0 billion; the bank also has NPR 1.0 billion of committed interbank lines. Its capital is NPR 4.0 billion against risk-weighted assets of NPR 39 billion, and its NPL ratio is 2.8%. The central bank's liquidity facility is priced at the bank rate plus 200 basis points and requires government securities as collateral. The bank's chairman is a former minister and asks for an emergency guarantee without collateral.
1. Compute a 30-day liquidity coverage ratio using the data given, and a five-day cash coverage measure. Is this a liquidity problem, a solvency problem, or both?
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Thirty-day net outflow = projected outflow 9.0 - contracted inflows 2.0 = NPR 7.0 billion. Liquid assets are NPR 4.5 billion, so the liquidity coverage ratio is 4.5/7.0 = 64.3%, below 100%; the shortfall is NPR 2.5 billion. For five days, liquid assets 4.5 plus the committed interbank line 1.0 = NPR 5.5 billion against NPR 6.0 billion of withdrawals, a NPR 0.5 billion shortfall. That is a genuine liquidity problem. But capital is NPR 4.0 billion against RWA of NPR 39 billion, a CAR of 10.26%, below the 11% minimum in this scenario. The bank is thinly capitalized, so a fire sale of loans to meet withdrawals could turn the liquidity problem into insolvency. The correct diagnosis is both: an acute liquidity run layered on a weak capital position. NPLs of 2.8% are not yet the main problem; confidence and funding structure are.
2. Advise the central bank on whether to provide liquidity support. Specify collateral, pricing, conditions and the reason an unsecured guarantee is inappropriate.
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Liquidity support can be justified only if the bank is assessed as solvent but illiquid. The central bank should lend against the NPR 3.0 billion of Treasury bills, with a haircut, at the bank rate plus 200 basis points or higher, for a short tenor. It should require a liquidity plan, a capital restoration plan, a freeze on dividends and management bonuses, and daily reporting of deposit flows. The unsecured guarantee requested by the chairman should be refused: it transfers private risk to the central bank, weakens collateral discipline and creates moral hazard for other banks. If the bank cannot post sufficient collateral, the central bank should consider a resolution route, not a blanket guarantee. Any support should be disclosed in aggregate and accompanied by a communication strategy to counter the false rumor.
3. Assume the bank is ultimately placed in liquidation. Deposit insurance covers up to NPR 500,000 per depositor. About 80% of depositors by number are fully covered, but large depositors hold 45% of deposit value. Explain the payout and stability implications.
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The insurance scheme protects small depositors, which limits social distress, but the 45% of deposit value held by large depositors is largely uninsured. A liquidation would therefore impose significant losses on businesses and local institutions, with contagion risk for other development banks. The payout cost should be estimated from covered deposits, not total deposits; the 80% by number figure is not a cost estimate because many covered accounts are small. The supervisor should coordinate with the insurer, publish a clear timeline, and ring-fence insured deposits. For the system, the case argues for stronger liquidity monitoring, limits on reliance on large uninsured deposits, and a resolution framework that can transfer insured deposits and good assets rather than simply liquidate. Moral hazard must be balanced against depositor confidence.