July 4: Following excess liquidity in banks and financial institutions, short-term interest rates including that of treasury bills and interbank transactions have started to decrease. Due to the non-disbursement of loans compared to deposit collection, the interest rate of treasury bills has fallen below 5 percent as the investment of banks is focused on bonds. Similarly, the interest rate of interbank transactions has also dropped below the target of monetary policy.

The minimum interest rate of 4.73 percent has been maintained on the treasury bills issued by Nepal Rastra Bank on Monday. Two weeks ago, the interest rate of treasury bills had dropped to 4.29 percent. After the central bank mopped excess liquidity through reverse repo, the interest rate, which reached above 5 percent last week, decreased again.

On Monday, the NRB announced bids for treasury bills worth Rs 8 billion with maturity period of 28 days. Similarly, the central bank also announced bids for 91-day T-bills worth Rs 7.75 billion, 182-day T-bills Rs 5 billion and 364-day T-bills worth Rs 8.91 billion. The average interest rate of 28-day treasury bill is 4.23 percent, 6.05 percent for T-bills with maturity period of 91 days, 6.71 percent for 182-day T-bills and 7.04 percent for T-bills with maturity period of 364 days.

Earlier last week, the interest rate on treasury bill for 28 days was 5.61 percent, 6.8 percent for 91 days, 6.89 percent for 182 days and 7.19 percent for 364 days.

Treasury bills are short-term government bonds used to raise domestic debt with a maturity period of less than one year. It is sold to raise short-term funds needed by the government. Although the liquidity situation with the banks has eased, since there is no loan investment, they have bought treasury bills even though the interest rate has been reduced. At the beginning of the current fiscal year, the average interest rate of treasury bills exceeded 12 percent. Last January, it decreased to around 5 percent, but it increased again to 8 percent.

Although the liquidity situation in the banks has improved recently, they have not been able to extend loans. Due to this, they focus on short-term investments including government bonds.

According to the central bank, the average loan-deposit ratio (CD ratio) of banks has dropped to 83.55 percent as of Saturday. As banks are allowed to provide loans by maintaining a CD ratio of up to 90 percent, they have the ability to provide loans of more than Rs 350 billion. However, with high interest rates and reduced economic activity, there is no demand for loans.

As of Saturday, banks have a total deposit portfolio of Rs 5608 billion while loan investment stands at Rs 4862 billion. As the liquidity in the banks increased, the interbank interest rate also fell to 3.01 percent on Saturday. After the interbank interest rate fell below the monetary policy target, the central bank issued reverse repo.

Two weeks ago, after the inter-bank transaction interest rate fell to 2 percent, the central bank mopped Rs 23 billion from the market through reverse repo. After that, the interest rate, which had increased to more than 5 percent, decreased again to 3 percent.

In the monetary policy, there is a provision to issue repo/reverse repo if the average interest rate of interbank transactions is more or less by 2 percentage points than the policy rate.