2nd February 2025, Kathmandu
Nepal Rastra Bank (NRB) is continuing its efforts to manage the excess liquidity in the banking system. On Sunday, the central bank will withdraw NPR 40 billion through a Deposit Collection Auction (Bolkabol) mechanism. This move aims to reduce liquidity in the banking sector and ensure proper monetary control.
NRB Liquidity Auction NPR 40 Billion
21-Day Deposit Collection Auction
NRB will collect the liquidity for 21 days. The interest for the deposited funds will be paid on February 23. The interest rate will be determined by the auction process. The minimum bid amount is set at NPR 10 crore, while the maximum bid amount will be NPR 5 crore. The remaining balance will be taken based on the total amount announced.
Eligibility for Participation
Banks and financial institutions in categories ‘C’, ‘B’, and ‘A’, as authorized by NRB, are eligible to participate in the auction. Only these institutions can bid for the NPR 40 billion liquidity withdrawal.
Excess Liquidity in the Banking System
The move to withdraw NPR 40 billion comes as a response to the surplus funds held by banks. Banks have deposited over NPR 2.67 trillion with NRB. The banking sector has seen little loan demand, leading to this excessive liquidity. NRB continues to drain the funds to manage the money supply effectively.
Cumulative Liquidity Drain in the Current Fiscal Year
This liquidity withdrawal has been part of NRB’s ongoing strategy since the beginning of the fiscal year. To date, NRB has removed NPR 14.51 trillion from the banking system. This includes NPR 16.93 trillion withdrawn through Deposit Collection Auctions and NPR 12.82 trillion through permanent deposit facilities.
Impact on Interbank Interest Rates
NRB had set a policy to keep the interbank interest rate aligned with the policy rate. However, despite these efforts, the interbank rate has remained below 3%, even though the policy rate is set at 5%. The measures taken so far have had limited impact on pushing the rates higher.
Ongoing Excess Liquidity Challenge
Banks continue to hold large sums in NRB deposits due to a lack of demand for loans and a shortage of investment opportunities. As a result, the banking system remains with excess liquidity, which NRB must continuously manage.
Next Steps for NRB
With NPR 2.67 trillion still held by banks, NRB will further reduce liquidity on Sunday by withdrawing an additional NPR 40 billion. This is part of NRB’s broader effort to manage liquidity and promote a balanced monetary environment in the country.
For more: NRB Liquidity Auction NPR 40 Billion