Kathmandu-Nepal Rastra Bank (NRB) is set to withdraw an additional Rs. 20 billion from the banking system today, Chaitra 10, as part of its ongoing efforts to manage excess liquidity. This measure comes as banks and financial institutions struggle with surplus funds due to declining credit demand.
Central Bank’s Move to Curb Excess Liquidity
The central bank has been consistently utilizing deposit collection tools to absorb surplus liquidity from the market. According to NRB, the bidding process for this withdrawal will take place at 3 PM today. Financial institutions wishing to participate can submit bids within the prescribed limits.
Bidding Guidelines for Financial Institutions
The NRB has outlined specific guidelines for deposit collection bidding:
- Eligible Bidders: Only financial institutions classified under categories ‘A,’ ‘B,’ and ‘C’ can participate.
- Bidding Limits: Institutions can bid for deposits in multiples of Rs. 100 million, with a maximum bid limit of Rs. 50 billion.
- Interest Rate Structure: The bidding process allows multiple bids at different interest rates.
- Maturity Period: The principal and interest of this 21-day deposit collection instrument will be settled on Chaitra 13.
Declining Credit Demand and Its Impact
The banking sector has been facing a persistent lack of credit demand, leading to an unusual liquidity surplus. As a result, banks and financial institutions are now lending funds to the central bank at an interest rate of around 3 percent, a situation that underscores the stagnation in loan disbursement.
According to financial analysts, the withdrawal of excess liquidity aims to stabilize the banking sector and prevent unwanted inflationary pressures. However, concerns remain about the sluggish demand for credit, which indicates a slowdown in investment activities and economic expansion.
NRB’s Monetary Policy Measures
To address the liquidity surplus, the NRB has been implementing various monetary policy measures, including:
- Deposit Collection: Regularly absorbing excess liquidity to prevent excessive money supply.
- Repo and Reverse Repo Operations: Adjusting short-term liquidity levels to balance market needs.
- Policy Rate Adjustments: Modifying interest rates to encourage borrowing and lending.
Despite these measures, financial experts suggest that unless there is a significant revival in credit demand, the banking sector may continue to face liquidity challenges.
Future Outlook
Market analysts believe that for a sustainable resolution, the government and private sector need to stimulate investment and economic activities. Without renewed borrowing interest from businesses and consumers, the banking system may continue to experience liquidity management challenges.
As Nepal Rastra Bank continues its efforts to stabilize the financial system, stakeholders will be closely monitoring upcoming policy decisions and economic trends.
