December 28: Nepal Rastra Bank has stepped up efforts to mop excess liquidity through deposit collection tools to control excessive liquidity in the banking system.

As the average interbank interest rate remained below the interest rate corridor even after the central bank collected more than Rs 200 billion within a month, the NRB decided to mop additional liquidity from the banking system.

Nepal Rastra Bank raised Rs 35 billion for 14 days on Wednesday through deposit collection equipment. This is the largest amount raised by the central bank through deposit collection instrument so far in the current fiscal year (FY) for liquidity management. Earlier, a deposit collection tool of up to Rs 25 billion was issued for a period of 14 days. Banks had submitted bids of Rs 38.40 billion for the deposit collection instrument issued on Wednesday. The banks quoted a minimum interest rate of 2.49% and a maximum of 3.12%.

Nepal Rastra Bank is also issuing deposit collection tools worth Rs 20 billion for a period of 7 days on Thursday.

In order to manage the excess liquidity in the financial system, the central bank raised Rs 232.25 within a period of one month by issuing deposit collection tools for 14 times. Of that amount, Rs 135 billion have matured and returned to the banking system.

The central bank stepped up efforts to mop excess liquidity after the interbank interest rate remained below the specified limit. As of Saturday, the average interbank interest rate remained at 2.58 percent.

According to the 'Interest Rate Corridor Procedure 2076', there is an provision to set the upper limit of the bank rate and the lower limit of the deposit collection rate and keep the interbank interest rate in between.

The central bank maintains this rate using various monetary instruments.

The central bank has lowered the deposit collection rate to 3 percent through the first quarterly review of the current fiscal year's monetary policy. Earlier this rate was 4.5 percent.

In the current year, the interbank interest has rate remained below the limit of the interest rate corridor but the central bank did not use any instrument to increase it until December. The central bank ignored it because the government was raising internal loans at cheap interest rates.

After the government met its debt collection target, the central bank has been aggressively mopping liquidity to maintain the interest rate corridor as the interbank interest rate remained below the limit.

In recent times, there is excess liquidity in the banking system due to non-disbursement of loans compared to the increase in deposit collection.

Last Saturday, the average credit-deposit ratio (CD ratio) of banks fell to 80.17 percent. According to the provision that banks can maintain a CD ratio of up to 90 percent and provide loans, they have the capacity to extend loans by Rs 5 93 billion.