October 1: The internal debt raised by the government has become cheaper as the liquidity in banks and financial institutions has eased and interest rates have been low. The interest rate on internal debts taken by Neal Rastra Bank declined after the central bank did not implement the announcement made in the monetary policy.

Taking advantage of this situation, the government changed the schedule and intensified debt collection.

The government has changed the internal debt collection schedule and increased the size of the debt to be collected within the first quarter (July/August-September/October). In the schedule published in mid-July, the government had a plan to raise internal debt of Rs 55 billion in the first quarter. This is 22.9 percent of the total loan of Rs 240 billion which the government intends to collect in the current fiscal year.

According to the new schedule, the government is going to raise Rs 80 billion in the first quarter. This is 33.3 percent of the target. As per the new schedule, priority has been given to long-term loans raised by issuing development bonds over short-term loans raised from treasury bills.

Initially, the central bank was planning to collect Rs 10 billion and Rs 15 billion with maturity period of six years in the second quarter. Now the NRB is preparing to collect the debt in the first quarter itself.

As per the initial schedule, the target was to issue bonds worth Rs 50 billion for a period of 5 to 8 years within the first quarter, but now the NRB has revised its plans and will be collecting Rs 75 billion in the first quarter. The targets for the third and fourth quarter remain the same.

The Nepal Rastra Bank aims to keep the average interbank interest rate higher than the bank rate and lower than the deposit collection rate through the monetary policy of the current fiscal year. The central bank can use various tools in order to maintain the upper limit of the interest rate corridor, the bank rate at 7.5 percent, and the lower limit of the deposit collection rate at 4.5 percent.

Although the interbank interest rate has fallen below the monetary policy target in the last two weeks, the central bank has not mopped excess liquidity from the market. In the monetary policy, it is mentioned that if the interest rate is higher or lower than the target, secondary market transactions and deposit collection will be opened. However, since September 13, the interbank interest rate has been consistently lower than the target. Even on last Tuesday, the average interbank interest rate remained at 2.57 percent.

Currently, banks and financial institutions have more than Rs 400 billion of liquidity.

Banks have not been able to invest in new loans due to the slowdown in economic activities. The investment of banks, that are unable to expand credit flow, is now limited to the internal debts of the government.

At present, the government is raising internal debt aggressively. The central bank has not even implemented the announcement of the monetary policy in order to help the government raise debt at a low cost, according to Nepal Rastra Bank sources.

On Monday, Treasury Bills were renewed at an interest rate of 3.441 percent. In July last year, the interest rate of treasury bills exceeded 12 percent.

Similarly, the interest rate of development bonds, which was 8.64 percent in last year, has been 6.96 percent in the current year.

Nepal Rastra Bank’s Deputy Spokesperson Dr Dilliram Pokharel says that the central bank did not mop liquidity from the market because current interbank interest rate is of short-term.

"The inter-bank interest rate has fallen below the target after the government allowed the accumulated amount of the local level to be counted as deposits," he said, "Monetary instruments have not been issued because the liquidity is high and there is no long-term interest rate reduction."