Nepal Rastra Bank Issues Rs 20 Billion Deposit Collection Instrument to Manage Excess Liquidity

The banking system has been facing a prolonged situation of excess liquidity. Despite a continuous decline in interest rates, credit expansion has remained sluggish and has failed to meet expectations. Due to weak economic activity, banks have been unable to increase lending, leading them to invest surplus liquidity in short-term financial instruments.

As liquidity continues to pile up in the banking system, managing the interest rate corridor has become increasingly challenging for the central bank. To address this situation, Nepal Rastra Bank has been repeatedly withdrawing funds from the system as part of its liquidity management efforts.

In this context, Nepal Rastra Bank has once again issued a deposit collection instrument worth Rs 20 billion for a period of 84 days to manage excess liquidity in the financial system. Previously collected deposits amounting to Rs 563.10 billion through similar instruments have yet to mature.

Interested banks and financial institutions can submit bids through the auction process until 2:00 PM today. The principal and interest payment date has been fixed for Chaitra 21. The interest rate will be determined through the bidding process itself. Banks and financial institutions may apply for a minimum of Rs 100 million, with allocations made in multiples of Rs 50 million up to the total issued amount.

Earlier, the central bank had also issued a deposit collection instrument worth Rs 20 billion for 84 days last Sunday. In that auction, 12 banks and financial institutions deposited Rs 19.75 billion, with the average interest rate recorded at 2.74 percent. This marks the second liquidity absorption operation by the central bank since the beginning of the month of Poush.

In recent months, deposits in the banking system have been increasing steadily, while credit demand has not grown at the same pace, resulting in excess liquidity. As surplus funds continue to accumulate, liquidity management has become more challenging for the central bank.

Since the start of the current fiscal year, Nepal Rastra Bank has absorbed a total of Rs 1.367 trillion through deposit collection instruments across 37 occasions. Additionally, banks have deposited Rs 318.50 billion under the Standing Deposit Facility (SDF). A total of Rs 881.60 billion, which could not be invested, has been parked by banks at the central bank.

At present, banks and financial institutions have approximately Rs 1.15 trillion in investable funds. Total deposits in the banking system have reached nearly Rs 7.6 trillion, while credit investment stands at Rs 5.675 trillion during this period. Although banks are allowed to lend up to 90 percent of their deposits, the current credit-to-deposit (CD) ratio stands at 74.07 percent. This indicates that banks still have around Rs 1.141 trillion available for further lending.