Central bank absorbs banks’ excess liquidity of Rs 14.861 trillion in seven months
KATHMANDU, March 23: The banks and financial institutions (BFIs) are found reducing their investment in short-term instruments offered by Nepal Rastra Bank (NRB), citing an increasing demand for loans in recent days.
According to the NRB, the BFIs parked only Rs 15.20 billion in the central bank against the NRB’s notice issued on Sunday to mop Rs 40 billion of liquidity lying in the banking system. Until a few months ago, the NRB used to receive applications for an excessive amount than the ones it offered for.
Revised interest rate corridor system introduced
The NRB records show that the BFIs issued loans worth Rs 283.46 billion, a growth of 5.6 percent in the first seven months of the current fiscal year. In the same period last year, the private sector lending increased by 4.1 percent to Rs 197.21 billion. Of the total lending, the BFIs’ loans on imports surged 69.5 percent. During the review period, the loans against shares increased 27.76 percent to Rs 115.11 billion.
As of last month, commercial banks citing the slow demand for loans reduced the average interest rate on loans to 8.55 percent from over 11 percent in a year. However, most of the banks have kept their lending rates stable for the month between mid-March and mid-April after they observed the demand for loans increased by nominal amounts.
As of Tuesday, the BFIs collected deposits of Rs 6.752 trillion, while they issued loans of Rs 5.455 trillion. The credit-deposit ratio has increased to 79.52 percent, compared to NRB fixed ceiling of 90 percent, shows the NRB record.
Meanwhile, the NRB absorbed excess liquidity worth Rs 14.861 trillion from the BFIs in the first seven months of the current fiscal year, after the BFIs failed to expand their businesses citing the ongoing economic slowdown.
The records with the NRB show that the central bank mopped up liquidity worth Rs 1.809 trillion through a bidding process collecting deposits from the BFIs. Likewise, the central bank received Rs 13.052 trillion under the Standing Deposit Facility (SDF) during mid-July and mid-February of FY 2024/25. In the same period of the last FY, the central bank mopped liquidity of Rs 27.94 billion in Nepali banking system by using various tools of the money market.
The central bank plays a crucial role in regulating interest rates. When interest rates in the financial sector are low, the central bank tends to accept deposits through auctions. The NRB introduced SDF in last FY for effective implementation of liquidity management. The system enables the BFIs to deposit their excess liquidity at the central bank for less than a month to earn a three percent interest rate.