7th September 2025, Kathmandu
Nepal Rastra Bank (NRB) has announced it will withdraw NPR 25 billion from the financial market for 21 days using its Deposit Collection Instruments.
NRB to Withdraw Funds
This move is part of the central bank’s broader strategy of open market operations to manage excess liquidity in the banking system, ensuring monetary stability and sufficient funds for lending. The operation is conducted through a competitive bidding process, in which licensed banks and financial institutions (classified as ‘A’, ‘B’, and ‘C’) are invited to participate. This proactive measure aims to prevent the negative effects of surplus liquidity, such as inflation and ineffective monetary policy.
The Mechanism and Rationale of Deposit Collection
The process for NRB’s deposit collection is structured as a competitive auction. Participating financial institutions submit bids to deposit a portion of their surplus funds with the central bank for a 21-day period. The bids are accepted in multiples of NPR 10 million, with a minimum increment of NPR 5 million. A key aspect of this mechanism is that NRB prioritizes bids with the lowest interest rate, making the process cost-effective for the central bank. This ensures that the financial institutions offering the most competitive rates get to place their deposits. The interest on these collected deposits will be paid on Ashoj 12, 2082 (approximately September 28, 2025). The collected funds can also be used as collateral for other transactions within the banking sector, adding a layer of systemic stability.
The primary rationale behind this action is to regulate liquidity in the financial system. Liquidity, in this context, refers to the amount of money banks have available for lending and other operations. When there’s too much liquidity in the system, it can create several problems. First, it can lead to a liquidity trap, where banks have funds but insufficient credit demand to lend them out profitably. This can cause interbank interest rates to fall, which can sometimes disincentivize prudent lending. Second, persistent excess liquidity can be a precursor to inflation, as a large supply of money chasing a limited supply of goods and services pushes prices up. By periodically withdrawing excess funds, NRB can:
Maintain Optimal Liquidity Levels: This ensures that banks have a healthy, but not excessive, amount of cash.
Stabilize Interest Rates: Controlling the money supply helps prevent volatile fluctuations in interbank and lending rates.
Strengthen Monetary Policy Transmission: When liquidity is well-managed, changes in the central bank’s policy rates can more effectively influence the broader economy.
This NPR 25 billion withdrawal is not an isolated event but rather a part of NRB’s continuous, systematic open market operations. By conducting these operations regularly, the central bank can fine-tune the financial system without causing sudden shocks.
Impact on Banks and Financial Institutions
For banks and financial institutions, NRB’s deposit collection instrument provides a mechanism to manage their surplus funds. Instead of holding on to unproductive cash, they can earn a return on it by placing it with the central bank. The competitive bidding process encourages institutions to offer attractive rates, which can be seen as a form of competition for earning interest on their excess reserves.
Furthermore, the withdrawn funds remain within the banking system, albeit under the central bank’s control, and can be used as collateral for other interbank transactions. This maintains a level of systemic stability, as banks can still access the necessary liquidity for their day-to-day operations through other means if needed. This tool also indirectly influences bank behavior, encouraging them to lend prudently rather than simply hoarding cash. NRB’s proactive and systematic approach to liquidity management is crucial for maintaining a robust and stable financial system in Nepal. It ensures that the financial sector remains healthy, capable of supporting economic growth, and responsive to the central bank’s monetary policy objectives.
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