Banks Park Nearly Rs 900 Billion in Excess Liquidity at Central Bank

Banks and financial institutions have parked nearly Rs 900 billion with Nepal Rastra Bank (NRB) as excess liquidity continues to build up in the financial system amid weak credit demand.

To manage surplus liquidity, the central bank has mopped up funds from the market through deposit collection auctions, the standing deposit facility and NRB bonds. According to NRB data, banks have placed Rs 496.8 billion through deposit collection auctions, Rs 299.5 billion via the standing deposit facility and Rs 100 billion in NRB bonds.

Of the total, deposit collection instruments carry a maturity period of 175 days, while the standing deposit facility is for two days.

As deposit collection and standing facilities alone failed to absorb excess liquidity, NRB began issuing bonds from mid-December. The central bank has decided to issue bonds worth Rs 200 billion and has already raised Rs 100 billion. Between December 29 and January 6, NRB issued bonds four times in tranches of Rs 25 billion each, attracting bids worth Rs 262.55 billion—around 2.6 times the offered amount.

The banking system had faced a liquidity crunch about two years ago after aggressive post-Covid lending by banks and financial institutions. However, tighter monetary policy subsequently slowed credit growth, resulting in persistent excess liquidity.

Although NRB adopted a relatively accommodative stance in the current monetary policy, credit expansion has remained sluggish. Despite easing provisions related to overdrafts and housing loans through the first quarterly review, lending growth has failed to pick up pace.

NRB data show that during the first four months of the current fiscal year (mid-July to mid-November 2025/26), deposits at banks and financial institutions rose by 3.1 percent, or Rs 222.38 billion, while credit flow increased by only 1.2 percent, or Rs 65.04 billion.

Former banker Pashuram Kunwar Chhetri said political uncertainty has weakened business confidence, limiting private-sector demand for loans.

“With political instability, the private sector is not in a position to seek additional credit,” he said. “Only if the government boosts spending and economic activity will confidence return.”

Chhetri noted that the financial system currently holds more than Rs 1100 billion in loanable funds, meaning the liquidity absorbed by NRB bonds will not significantly disrupt the market. “Despite continuous absorption of liquidity, interest rates are falling,” he said, adding that without the interest rate corridor, rates could have dropped to near zero.

NRB has been operating its monetary instruments under the interest rate corridor to manage liquidity and stabilise market rates. Under the Interest Rate Corridor Procedure, 2019, the bank rate serves as the upper limit and the deposit collection auction rate as the lower limit, with interbank rates kept within the corridor.

Currently, the lower bound of the corridor stands at 2.75 percent. As NRB continues to absorb excess liquidity to defend this floor, deposit interest rates have not fallen below that level.

However, economists have argued that absorbing liquidity alone will not resolve the problem. Speaking at a recent interaction programme organized by NRB, former National Planning Commission vice-chairman and economist Prithvi Raj Ligal said the solution lies in creating conditions for higher credit expansion in the market.

At the same programme, NRB Governor Dr Bishwo Poudel said monetary policy alone cannot fix the situation and stressed that he is not in favour of pressuring banks to expand lending at the cost of rising non-performing loans.