Nepal Rastra Bank To Withdraw Additional Rs. 25 Billion From Banking System Amid Excess Liquidity

30th July 2025, Kathmandu

The Nepal Rastra Bank (NRB) is once again taking decisive action to manage the nation’s financial system, announcing the withdrawal of an additional Rs. 25 billion from the banking sector.

Nepal Rastra Bank Withdrawal

This latest intervention, executed through its primary deposit collection instrument, underscores the central bank’s persistent efforts to absorb surplus funds. The move comes as commercial banks and financial institutions continue to grapple with sluggish credit demand, leading to an overabundance of liquidity within the system. Announced on Shrawan 14, 2082 (July 30, 2025), this measure highlights NRB’s cautious yet firm stance on maintaining monetary stability and ensuring efficient financial discipline amidst prevailing economic conditions.

The Latest Intervention: Details of the Deposit Collection Instrument

According to the public notice issued by the NRB, the bidding process for this round of liquidity withdrawal is scheduled to take place today at 3 PM. This rapid deployment reflects the urgency with which the central bank is addressing the liquidity overhang. The maturity period for these deposits is set for Bhadra 25, 2082 (September 10, 2025), making it a 42day term deposit collection instrument. This specific duration allows the NRB to manage shorttomediumterm liquidity fluctuations effectively while providing market participants with a clear timeline.

Participation and Bidding Mechanics:

Only licensed A, B, and C class banks and financial institutions are eligible to participate in this crucial bidding process. This targeted approach ensures that the central bank interacts directly with the core components of the financial system. Bidders are required to propose a minimum amount of Rs. 100 million, a threshold designed to manage the volume of bids. For larger contributions, the maximum amount will be accepted in tranches divisible by Rs. 50 million, with the NRB retaining the flexibility for partial allocations based on overall demand and its predetermined criteria.

The bidding process itself is strictly interest ratebased, allowing financial institutions to submit multiple bids at varying rates. This methodology offers banks a degree of flexibility in managing their surplus funds while providing the NRB with precise control over the overall cost and volume of liquidity absorption, making its interventions more granular and effective.

Understanding the Rationale: Why NRB Intervenes

Nepal’s banking system has been experiencing a significant overabundance of liquidity in recent months, a persistent challenge stemming primarily from tepid credit demand. With businesses and individuals borrowing less, financial institutions find themselves with a surplus of funds that they are struggling to deploy effectively into productive sectors of the economy. Consequently, many banks are currently compelled to deposit their excess liquidity with the central bank at interest rates hovering around a modest 3%. This rate is significantly lower than both market expectations and typical lending rates, creating a challenge for banks to optimize their returns on capital.

This persistent excess liquidity, if left unchecked, can have several destabilizing effects. It can disrupt the normal transmission mechanism of monetary policy, making it harder for the NRB to influence economic activity through interest rates. Furthermore, it can erode financial discipline within institutions by reducing the incentive to find productive lending opportunities. To proactively prevent potential inflationary pressures and to maintain overall monetary balance, the NRB has been consistently deploying a range of sophisticated tools. These include deposit collection instruments, reverse repurchase agreements (reverse repos), and term deposit auctions, all designed to sterilize excess funds from the market and prevent them from causing economic imbalances.

Broader Implications and Recent Trends in Monetary Policy

The central bank’s repeated and systematic liquidity withdrawal operations are a clear signal of its cautious stance toward maintaining monetary stability. This is particularly critical at a time when Nepal’s economy is in a delicate recovery phase, navigating the aftermath of previous fiscal slowdowns and dealing with a persistently low appetite for private sector credit. The NRB’s consistent actions also underscore its unwavering commitment to ensuring that the money supply within the economy does not significantly exceed the genuine, productive demand for funds, thereby avoiding the risk of asset bubbles or inflation.

Moreover, the strategic use of timebound liquidity absorption tools, such as this 42day term deposit collection, provides the NRB with crucial agility. It allows the central bank to continuously reassess prevailing market conditions in the short term and respond dynamically to evolving economic indicators. For financial institutions, participation in these NRB operations, despite the minimal interest rates, often remains the most pragmatic choice. Given their limited avenues to earn higher returns on idle cash, most banks find themselves in a position where the cost of not utilizing those funds—even at the NRB’s lower rates—remains a significant burden, compelling them to participate.

The Outlook: Awaiting a Revival in Credit Demand

Looking ahead, unless there is a substantial and sustained revival in loan demand—particularly from the private and industrial sectors—it is highly probable that the NRB will continue these liquidity absorption measures over the coming weeks and months. Market observers widely anticipate that unless robust structural reforms are implemented or significant fiscal stimulus measures are introduced to generate new investment and borrowing activity, the pervasive issue of excess liquidity will likely persist. This will, in turn, necessitate further such interventions by the central bank to maintain macroeconomic stability.

In the interim, all key stakeholders across Nepal’s banking and investment landscape will be keenly observing the NRB’s next strategic moves. This vigilance is especially heightened as the crucial budget implementation period for fiscal year 2082/83 gains full momentum, a phase that often influences liquidity dynamics significantly. The ongoing actions of the central bank are vital for guiding the nation’s financial health in these uncertain times.

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