Nepal Rastra Bank to Withdraw NPR 30 Billion Deposits Amid Excess Liquidity

20th August 2025, Kathmandu

The Nepal Rastra Bank (NRB) has initiated a significant step in its ongoing efforts to manage the country’s financial system liquidity by announcing the withdrawal of NPR 30 billion in deposits.

NRB Withdraws Deposits

This action, conducted through a competitive bidding process, is a direct response to the persistent state of excess liquidity in the banking sector, where total deposits have now surpassed NPR 7.2 trillion.

NRB’s Proactive Liquidity Management Strategy

The central bank’s decision is part of its standard open market operations, which are designed to absorb surplus funds from the banking system. According to the NRB’s Open Market Operations Procedures, instruments such as long-term deposit collection are used to address long-term excess liquidity. This specific withdrawal will have a tenure of approximately four weeks, with the principal and interest to be repaid on September 14, 2025.

By withdrawing liquidity, the NRB aims to achieve several key objectives:

• Stabilizing Interest Rates: Excess liquidity puts downward pressure on short-term interest rates, which can disrupt financial market stability. By mopping up these funds, the NRB helps to keep interest rates aligned with its monetary policy targets.
• Optimizing Credit Flow: Idle funds in the banking system are not being put to productive use. The NRB’s action encourages banks to seek out viable lending opportunities rather than simply parking funds with the central bank.
• Curbing Inflationary Risks: A prolonged period of high liquidity can lead to future inflationary pressures by increasing the overall money supply in the economy. The central bank’s intervention helps to mitigate this risk.

The Bidding Process: A Mechanism for Efficiency

The deposit collection will be conducted through an online competitive bidding system. Only banks and financial institutions licensed as commercial banks (Category A), development banks (Category B), and finance companies (Category C) are eligible to participate. The bidding process is structured to prioritize the most efficient pricing, with the lowest quoted interest rates receiving priority in the allocation until the NPR 30 billion target is reached. This method ensures that the process is fair and transparent, rewarding institutions that offer the most competitive rates.

The minimum bid amount is set at NPR 100 million, and the maximum is the total announced amount of NPR 30 billion. Bids must be in multiples of NPR 500 million, which further streamlines the process.

Context: The State of Nepal’s Banking Sector

The current situation of excess liquidity in the banking sector is a complex issue. While total deposits have been growing, largely driven by strong remittance inflows, credit disbursement has not kept pace. This has resulted in a declining credit-to-deposit (CD) ratio, which is now well below the NRB’s 90% threshold.

A report from myRepublica on July 21, 2025, notes that the CD ratio of some commercial banks has fallen as low as 62.59%. This indicates a significant underutilization of loanable funds. The accumulation of unutilized funds is also reflected in the fact that BFIs have parked hundreds of billions of rupees in the NRB’s Standing Deposit Facility (SDF). The low credit demand is attributed to a combination of factors, including economic uncertainty, a focus on loan recovery by banks, and a cautious approach from businesses towards expansion.

Conclusion

The Nepal Rastra Bank’s decision to withdraw NPR 30 billion is a critical and necessary measure to manage the current liquidity surplus. It is a clear signal that the central bank remains vigilant and committed to maintaining financial stability. By using a competitive, market-based approach, the NRB is not only addressing the immediate issue of excess liquidity but also reinforcing its policy framework for a more resilient and sustainable financial system. This active management is crucial to ensure that the banking sector can continue to support Nepal’s economic growth while mitigating the risks associated with an imbalance between deposits and credit.

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