The banking system is once again flushed with excess liquidity after a brief spell of contraction at the end of the third quarter.

With the surplus funds moped up by the Nepal Rastra Bank (NRB) starting to come back to the market, the banks are sitting on excess liquidity of Rs30 billion as of Wednesday.

The banking system had faced a slight liquidity deficit about four weeks ago after the central bank mopped up excess liquidity through its instruments and the

government absorbed

more funds through the issuance of bonds, according to NRB officials.

The fluctuation in the liquidity situation has affected interest rates. According to bankers, interbank lending rate, which had reached as high as 6 percent a few weeks ago, came down to 2.25 to 3.5 percent on Wednesday.

NRB Executive Director Min Bahadur Shrestha said the currently liquidity situation is likely to continue until the end of the fiscal year, with the NRB’s “deposit collection” instrument maturing. The “deposit collection”, an instrument used by the central bank to absorb excess liquidity from the banking system, has a three-month maturity period.

So far, Rs50 billion has come back to the market from the central bank, while the month of Baishakh (mid-April to mid May) will see Rs60 billion returning to the banks. The banks will get an additional Rs40 billion in Jestha (mid-May to Mid-June).

As the government also spends in the last quarter massively, a large amount of cash is deposited in banks in the period. “During the last quarter of a fiscal year and the first quarter of the following fiscal year, banks make little lending and hold a lot of cash,” said Shrestha. “This structural problem has to be addressed.”

Given this context, the central bank is preparing to introduce “NRB bond” worth Rs50 billion to observe excess liquidity during this period. “A proposal has reached to the NRB board. We have targeted to issue the bond by March-end,” said Shrestha.  

The central bank expects an excess liquidity of Rs100 billion in banks in the last quarter of this fiscal year, which will continue to the first quarter end of the upcoming fiscal.

In the third quarter this year, the banks had increased lending, particularly in import financing, after failing to lend for the first two quarters due to the Indian embargo. With the increase in lending and the central bank also mopping up of liquidity, the banks had hiked interest rates on deposits.

“Some banks had increased the interest rate on fixed deposits to 6.5 percent from 4.5 percent at the end of the third quarter,” said Himalayan Bank CEO Ashoke Rana.

Rana, however, believes the excess liquidity situation this year may not be as large as that seen in the previous years as lending has picked up. “Lending for imports has grown,” he said.

The banking system has been facing excess liquidity for the past four years.