24th September 2025, Kathmandu
Nepal Rastra Bank (NRB), the country’s central bank, has taken a proactive step to manage the rising liquidity within the banking system.
NRB to Withdraw 40 Billion
In a bid to maintain financial stability and control the surplus money supply, the NRB announced it would withdraw NPR 40 billion on Ashwin 8, 2082 (September 24, 2025). This action comes in response to a prolonged period of low loan demand, which has left banks and financial institutions with a large amount of idle cash. The NRB’s intervention is crucial, as excess liquidity can create market pressures, potentially leading to lower interest rates and, in some cases, currency instability.
The Mechanism: Deposit Collection Instrument
The NRB utilizes a monetary policy tool known as a deposit collection instrument to temporarily absorb excess funds from the financial system. This instrument is a key part of the central bank’s liquidity management framework. The bidding process for today’s withdrawal was scheduled for 3 PM, with participation open to all licensed banks and financial institutions classified as ‘A’, ‘B’, and ‘C’.
The process provides flexibility for participating institutions:
- Bidding Amounts: Banks willing to deposit funds with the central bank can bid in amounts starting from NPR 10 crore and in increments of NPR 5 crore.
- Bidding Flexibility: Bids can be submitted at a single interest rate or at multiple rates, allowing institutions to align their offers with their specific liquidity needs and profitability goals. Any remaining amount not covered by successful bids will be collected by the central bank as residual.
- Term: This particular deposit collection period will last for four days, with the principal and interest payments scheduled for September 28 (Ashwin 12).
This measure is one of several tools in the NRB’s arsenal for liquidity management, which also includes reverse repo operations, outright sales of government securities, and the issuance of NRB bonds. The use of such instruments helps the central bank to manage short-term liquidity fluctuations and prevent the negative consequences of a market awash with idle cash.
Why is Liquidity High in Nepal’s Banking System?
Nepal’s banking sector has been grappling with excess liquidity for some time, a situation primarily driven by a stagnation in loan demand. This is often a result of broader economic uncertainties, which make businesses and individuals reluctant to borrow. When credit demand is low, the funds that banks mobilize from deposits remain unlent. This leads to a mismatch between deposits and loans, a situation often reflected in a low Credit-to-Deposit (CD) ratio. While a healthy banking system should have a balance between these two, a low CD ratio indicates that banks are struggling to deploy their deposits into productive investments.
As a result, banks find themselves with large cash reserves that generate minimal returns. In such a scenario, they are often willing to deposit these funds with the central bank, even at relatively low interest rates, simply to park the idle cash in a secure and organized manner. Without the central bank’s intervention, this surplus cash could lead to a significant drop in interest rates, which, while seemingly beneficial, can lead to imprudent lending and asset bubbles in the long run.
Recent data from the NRB shows that the banking sector’s total deposits stand at NPR 7.354 trillion, while total lending is at NPR 5.627 trillion, resulting in a low CD ratio of 75.57%. This confirms the persistent state of excess liquidity in the system, which NRB is actively trying to manage through these interventions.
The Central Bank’s Crucial Role
The NRB’s decision to withdraw liquidity is a critical function of its role in maintaining financial stability. By effectively managing the money supply, the central bank helps to:
Stabilize Interest Rates: Excessive liquidity can drive down interbank and lending interest rates to unsustainably low levels, which can negatively impact bank profitability and encourage risky borrowing. By absorbing this liquidity, the NRB helps to keep interest rates stable and within a healthy range.
Control Inflation: While not a direct cause, an unchecked supply of money can contribute to inflationary pressures in the economy. The NRB’s interventions help to prevent this by ensuring that the money supply remains at a level consistent with economic growth and price stability.
Enhance Market Confidence: Regular and transparent liquidity management signals that the central bank is actively monitoring and steering the economy. This builds confidence among banks, investors, and the general public, ensuring that the financial system remains resilient and trustworthy.
The ongoing use of instruments like the deposit collection instrument highlights the NRB’s commitment to a sound and stable financial market, which is essential for the long-term sustainable economic growth of Nepal. By providing a secure avenue for banks to manage their excess funds, the central bank ensures that the financial system remains robust and prepared for future economic challenges.
For More: NRB to Withdraw 40 Billion