NRB implements strategies to balance funds and interest rates

Kathmandu: Nepal’s banking sector grapples with an overflow of investable funds, reaching 540 billion rupees. However, despite this surplus, banks face a declining loan-to-deposit ratio, now at 80.92 percent, impeding credit flow.

In response, the Nepal Rastra Bank (NRB) aims to sustain a 90 percent loan-to-deposit ratio via monetary policy. This suggests untapped lending potential, with financial institutions operating 9 percent below the NRB’s set limit.Recent data from NRB highlights a total deposit collection of 5949 billion rupees and loan disbursement of 4.980 trillion rupees by financial institutions.

The surplus liquidity has pushed inter-bank interest rates to a record low. Although the central bank sets the deposit collection rate as the lower limit at 4.5 percent, the current interbank rate rests at 1.48 percent.To manage this excess liquidity, the NRB initiates liquidity withdrawal measures from the system, a departure from their prior stance of not utilizing reverse repo.

In the first quarter, the NRB raised 9.737 trillion rupees of internal debt for the government through development bonds and treasury bills.The interest rate corridor dictates that if inter-bank rates surpass the policy rate, the NRB injects liquidity through repo. Conversely, if rates dip below the deposit collection rate, the NRB provides liquidity through reverse repo.

In the current fiscal year’s monetary policy, the NRB has set the upper limit of the interest rate corridor at 7.5 percent for the permanent liquidity facility rate, with the policy rate at 6.5 percent and the deposit collection rate at 4.5 percent.Despite abundant investable funds, the NRB, starting November 22, has opted for liquidity extraction from the system through 7-day reverse repo, withdrawing a total of Rs 45 billion by December 3.

This liquidity abundance has driven down treasury bill interest rates. Seizing the opportunity, the nation is swiftly renewing treasury bills at reduced rates.As per the National Bank’s latest announcement, the interest rates stand at 1.73 percent for the 28-day treasury bill, 3.91 percent for the 91-day treasury bill, 3.87 percent for the 182-day treasury bill, and 4.63 percent for the 364-day treasury bill.