Plenty of Cash, Few Takers

Nearly Rs 900 billion in excess liquidity held by banks and financial institutions has been parked at the Nepal Rastra Bank.

As the banking system remains awash with surplus funds, the central bank has been mopping up liquidity through deposit collection auctions, the Standing Liquidity Facility, and NRB bonds. Excess liquidity depresses interest rates and increases the risk of capital flight. Under the interest rate corridor framework, the NRB absorbs funds to maintain the minimum policy rate.

In the current fiscal year 2025/26, the NRB has absorbed large volumes on a transaction basis. This includes Rs 1,816.60 billion through deposit collection auctions, Rs 30,762.35 billion via the Standing Liquidity Facility, and Rs 200 billion through NRB bonds.

As of Sunday, March 1, the amount still parked with the central bank stood at Rs 884.45 billion. Of this, Rs 560 billion was held through deposit collection auctions. Another Rs 200 billion was invested in NRB bonds. The remaining Rs 124.85 billion was parked under the Standing Deposit Facility.

On Sunday alone, the NRB issued a deposit collection auction worth Rs 110 billion for 87 days. BFIs submitted bids totalling Rs 114 billion. This was the longest-tenure deposit auction issued in the current fiscal year.

As deposit auctions and the Standing Deposit Facility proved insufficient to manage surplus liquidity, the central bank raised one-year liquidity through bonds in Poush, mid-December to mid-January. Between December 29 and January 14, it raised Rs 200 billion through nine bond issuances.

NRB spokesperson Guru Prasad Paudel said longer-term instruments were introduced due to sustained liquidity conditions. “The excess liquidity currently seen in the financial system appears likely to persist for a longer period,” he said. “Therefore, the central bank is issuing longer-term instruments to absorb liquidity.”

The NRB has adopted a more flexible stance on credit expansion in the current fiscal year’s monetary policy. In the first quarterly review, it lowered policy rates to spur lending. It also raised the personal overdraft limit from Rs 5 million to Rs 10 million and increased the collateral-based lending cap of microfinance institutions from Rs 700,000 to Rs 1.5 million.

In the second quarterly review released last week, the NRB announced a more flexible approach to working capital and priority sector lending. However, weak economic activity has kept credit growth subdued.

Although monetary policy projected a 12 percent rise in private sector credit in FY 2025/26, year-on-year growth stood at just 6.7 percent by mid-January.

NRB data show that, as of Thursday, February 26, banks and financial institutions had the capacity to extend an additional Rs 1,200 billion in loans. By then, BFIs had mobilised Rs 7,732 billion in deposits and extended Rs 5,812 billion in credit. The credit-to-deposit ratio stood at 74.40 percent, against the permissible ceiling of 90 percent.

The NRB has described the current low interest rate and high liquidity environment as a strong base for broad-based economic growth. “Low interest rates, high liquidity and adequate foreign exchange reserves have created a solid foundation for sustainable and broad-based growth through increased investment,” the second quarterly monetary review stated. “Overall financial stability remains intact, and effective implementation of the Financial Sector Development Strategy will further strengthen the sector.”