The Nepal Rastra Bank (NRB) on Monday issued bonds to draw additional liquidity of Rs 25 billion from the open market for one year. The central bank has introduced the ‘NRB Bond’ instrument for long-term management of excess liquidity in the financial sector.

The bond is a monetary instrument used by the National Bank to withdraw money from the market for a long period (more than one year). The bank has issued the bond for the first time in 10 years. Earlier, Rs 49.08 billion was withdrawn from the market through this instrument in the fiscal year 2072/73.

The amount that can be lent (excess liquidity) has been accumulating in the financial system for about three years. The National Bank has been regularly withdrawing money from the market two days a week (Sunday and Wednesday) as needed to manage the liquidity of the financial system. For this, the National Bank has been using the deposit collection and standing deposit facility (SDF) tools. Accordingly, the National Bank has been withdrawing money from the market for a short period of up to 6 months through the deposit facility.

However, recently, as there has been no improvement in the excess liquidity situation, the central bank has withdrawn Rs 25 billion from the market by issuing a National Bank bond after 10 years. In the bond issued on Monday, 32 banks and financial institutions submitted 129 proposals for Rs 120.55 billion in the bond issued for a bid of Rs 25 billion. The interest rate (coupon rate) has been fixed at 2.64 percent in the bid. The fact that applications were received for a much higher amount than the NRB had called for confirms that there is sufficient liquidity in the financial system.

NRB officials say that the bond was issued for a period of one year as the current excess liquidity in the financial sector is structural in nature and is not expected to decrease immediately. ‘Since the current liquidity situation is structural in nature (medium-term in nature), for the first time since 2072 BS, NRB has drawn Rs 25 billion from the market for a period of one year through bond,’ said Prabhu Dilliram Pokharel, Head of the Currency Management Department of NRB. ‘Earlier, NRB had been drawing excess liquidity from the market for a period of 3 to 6 months through deposit collection instruments. The money has been withdrawn for one year as it is not expected that the excess liquidity situation will decrease immediately.'

The NRB had announced the issuance of NRB bonds through the monetary policy for the current fiscal year. Pokharel informed that the same policy has now been implemented. 'To make the structural liquidity management in the banking system effective, NRB bonds will be issued as needed,' the NRB has said in its monetary policy.

The NRB has withdrawn money from the market six times through similar bonds. In the fiscal year 2049/50, NRB withdrew Rs 24.88 billion from the market through NRB bonds. At that time, the interest rate corridor like the one currently in operation was not in operation. The NRB had been withdrawing money from the market for the short or long term depending on the liquidity situation. At that time, the amount was excess liquidity, except for the amount that banks and financial institutions had to keep with NRB as compulsory cash reserves (CRR). Based on that, money is being withdrawn from the market when there is excess liquidity in the market. Currently, the interest rate corridor is in operation. Therefore, the upper ceiling of the corridor (standing liquidity facility rate) is 5.75 percent. 

The lower limit of the corridor (standing deposit facility) is 2.75 percent. Thus, when the lending rate between banks (interbank rate) is more than 5.75 percent, the NRB sends money to the market. Similarly, when the interbank rate falls below 2.75 percent, the NRB withdraws money from the market.

The NRB has been withdrawing money from the market for the last three years as the interbank rate has remained below 2.75 percent. The NRB is preparing to withdraw money through this bond in the coming days as well. According to sources, the Open Market Operations Committee has already decided to withdraw Rs 2 trillion from the market through NRB bonds. The source said that the committee can decide and withdraw more than that amount as per the requirement.

Earlier, the National Bank had withdrawn Rs 65.72 billion from the market in the fiscal year 2050/51, Rs 45.74 billion in the fiscal year 2051/52, Rs 9.37 billion in the fiscal year 2052/53 and Rs 49.08 billion in the fiscal year 2072/73. At that time, the National Bank had not issued such bonds.

Since last Shrawan, the National Bank has withdrawn Rs 26.964 billion from the market, of which Rs 26.53 billion has been withdrawn. Of this, a large amount has been returned after the maturity period. Of the amount withdrawn in this way, Rs 621 billion 80 billion has been invested as of Monday, according to the data of the National Bank.

As of last Saturday (27 Mangsir), the total deposits in banks and financial institutions are Rs 75.92 billion. During the same period, the credit-deposit ratio (CD ratio) of banks and financial institutions is 74.11 percent. According to the instructions of the Nepal Rastra Bank, banks and financial institutions are allowed to lend up to a maximum of 90 percent of their total deposits. During the same period, the total credit flow of banks and financial institutions is Rs 5.69 trillion. By the end of Asaram, the investable amount in banks and financial institutions was more than Rs 1.142 trillion.

Banks and financial institutions must keep 20 percent of their total deposits in cash in banks. When all banks maintain liquidity at a rate of 20 percent, the amount spent is equal to about one percent of the CD ratio. Although banks and financial institutions are allowed to maintain a CD ratio of up to 90 percent of deposits, they are allowed to go up to 89 percent because they have to maintain 20 percent liquidity. Even based on these facts, bankers say that banks and financial institutions have about Rs 1.066 trillion in the financial system as of 27 Mangsir.