The central bank has issued a notice of “deposit collection” to A, B and C class financial institutions to raise Rs 20 billion. The action is scheduled for Tuesday, and the maturity period of the deposit collection is three months.

Banks and financial institutions (BFIs) currently have excess liquidity of more than Rs 70 billion, according to NRB.

Under the “deposit collection” scheme, the central bank should not put collateral to absorb funds from BFIs. The central bank has so far been absorbing liquidity in BFIs through reverse repo, under which it puts government securities such as treasury bills up as collateral.

 “The lack of adequate securities with the central bank was hindering our efforts to mop up liquidity at higher scale,” said a senior NRB official. “The deposit collection instrument will pave the way for absorbing as much liquidity as we want.”

Officials say as the central bank has the authority to print notes, it was not in fact necessary to put collateral to absorb excess funds from BFIs, it simply followed

the tradition in the case of reverse repo.

Due to excess liquidity situation, BFIs are getting 0.04 percent interest on treasury bills, while interbank rate stands at 0.2 percent, according to the central bank.

The central bank has also introduced working procedure on the “deposit collection” instrument. As per the procedure, NRB will accept funds only from A, B and C class FIs. A BFI should deposit at least Rs 50 million. And if it wants to invest more, it has to put in amount that is multiple of Rs 50 million.

The interest rate would vary as per the bidding, and bids with the lowest interest rates will get the priority. “If the bidding with the same interest rate surpasses the amount be to be absorbed, the central bank will take the funds from those bidders based on the bid percentage,” said the NRB official.

BFIs can put such “deposits” up as collateral during inter-bank lending, but cannot do the same to receive funds from the central bank.