KATHMANDU: Nepal Rastra Bank (NRB) is floating an instrument called term deposit on Thursday to mop up Rs five billion from the banking sector,
as banks and financial institutions (BFIs) have once again started feeling the pressure of excess liquidity.
Liquidity has lately been building up in BFIs due to maturity of the term deposit instrument and repayment of debt raised by the government.
On Tuesday, Rs 10 billion was channelled towards BFIs following maturity of term deposit instrument issued on January 7. Another Rs 10 billion will go towards banks on Sunday after term deposit instrument issued on January 12 matures.
Also, the government has been repaying debt raised in the past.
The government plans to repay Rs 42.55 billion in debt by the end of this fiscal year, of which Rs 20.80 billion will be repaid within April 13.
"Because of maturity of these instruments and gradual repayments of debt, excess liquidity in the banking system currently stands at around Rs 50 billion to Rs 52 billion," a senior NRB official said on condition of anonymity.
NRB has been using instrument called term deposit since the beginning of this fiscal year in mid-July to mop up the excess liquidity from the banking sector.
So far, it has already used this instrument 10 times to absorb Rs 85 billion. This instrument allows commercial banks, development banks and finance companies to park their money at NRB for a period of three months at interest rates fixed through auction.
Among others, NRB has also used instrument called reverse repo to mop up Rs 252.80 billion from the banking sector so far this fiscal year.
NRB uses various instruments to absorb excess liquidity to prevent surplus funds from flowing into unproductive sectors, like stock and real estate markets, which tend to drive up asset prices and build inflationary pressure.
The banking system has been reporting high levels of excess liquidity since the beginning of this fiscal year — except around two months ago, when interbank lending rates shot up due to deceleration in remittance flow and higher credit demand.
At that time, interbank lending rates, which had stood at less than one per cent for over one-and-a-half years, shot up to as high as five per cent. This indicated some of the banks were facing cash crunch and were borrowing from other institutions, which raised the spectre of another round of credit crisis surfacing in the banking sector.
"But that situation did not last for long and liquidity seems to be building again in the banking system," the NRB official said.