Excess Liquidity in Banks: NPR 237.85 Billion Deposited with Nepal Rastra Bank

Banks and financial institutions have deposited NPR 237.85 billion, which they couldn’t invest in loans, with Nepal Rastra Bank (NRB). Due to excess liquidity in the banking system, banks have placed this amount with the central bank through the Standing Deposit Facility (SDF) and deposit collection instruments as of Monday, Chaitra 25, 2081.

On Monday alone, banks and financial institutions deposited NPR 127.70 billion with NRB. Of this, NPR 96.40 billion was placed through SDF, while NPR 31.30 billion was deposited via deposit collection instruments. Banks have reduced investments in deposit collection tools and increased allocations to SDF, signaling expectations of potential credit expansion.

On the same day, NRB aimed to mop up NPR 35 billion in liquidity for 23 days through deposit collection instruments, but nine banks and financial institutions deposited only NPR 31.30 billion, with an average interest rate of 2.99 percent. Currently, NPR 141.45 billion invested in deposit collection instruments remains outstanding. Since the start of the current fiscal year until Chaitra 25, NRB has absorbed NPR 21.07 trillion in liquidity through this tool across 63 instances.

NRB injects liquidity into the market when the interbank interest rate exceeds 3 percent and withdraws it when the rate falls below this threshold. While banks did not deposit the full amount requested under deposit collection tools, they placed NPR 3.65 billion more in SDF compared to the previous instance. Funds in SDF mature in three days.

Since last Falgun, NRB introduced the SDF to enhance the effectiveness of its interest rate corridor, allowing banks and financial institutions to deposit excess liquidity with the central bank. With rising liquidity but stagnant loan demand, banks have been investing in short-term instruments to generate income. Since the fiscal year began, banks have utilized NPR 146.95 trillion in SDF across 107 instances, including Monday’s deposits.

Per open market operation guidelines, SDF is available three days a week—Sundays, Tuesdays, and Thursdays. Due to a public holiday on Sunday, the facility was provided on Monday, and the deposited amount will mature on Tuesday, Chaitra 26. This amount cannot be counted toward the Cash Reserve Ratio (CRR) but can be included in the Statutory Liquidity Ratio (SLR) and net liquid assets ratio as per NRB directives.

According to NRB, the banking system currently holds NPR 67.85 trillion in deposits, with NPR 54.71 trillion invested in loans. Banks are allowed to lend up to 90 percent of their deposits. The current credit-deposit (CD) ratio stands at 79.38 percent, indicating that banks have approximately NPR 6.35 trillion in investable funds.