February 26: Banks and financial institutions have deposited nearly Rs 100 billion in Nepal Rastra Bank in a single day. Due to the excess liquidity in the banking system, the banks deposited the amount in the central bank on Sunday under the standing deposit facility, an overnight facility that enables banks to transfer excess liquidity to earn higher rate of interest.

In order to effectively implement the interest rate corridor, the central bank started the standing deposit facility from mid-February to allow the banks and financial institutions to deposit their excess liquidity with the central bank. Under this facility, bank deposits worth Rs 96.15 billion were transferred to the Nepal Rastra Bank on Sunday alone.

This is the highest amount deposited in the central bank after the introduction of this facility. So far, banks have already used this facility four times depositing Rs 253.65 billion with the central bank.

An official of the central bank said that large amount of liquidity is being stocked at the NRB due to excess liquidity in the banking system.

"Large amounts of deposits have started to flow to the central bank under the standing deposit facility," said the official, adding, "It seems that banks do not want to take the risk of credit disbursement."

As per the regulations and procedures related to the open market transactions, there is a provision to provide standing deposit facility to banks for two days a week on every Sunday and Wednesday. Banks are entitled to receive 3 percent for the deposits under this facility with a maturity period of four days.

In the current fiscal year (FY), banks and financial institutions have excess liquidity as the deposit collection is higher than credit flow. In order to manage excess liquidity in the financial system, the central bank started issuing deposit collection tools from mid-November of the current fiscal year and raised Rs 550 billion by mid-February. However, as the central bank could not maintain short-term interest rate according to the interest rate corridor, it started the standing deposit facility from mid-February as per the announcement made in the monetary policy. After the launch of the facility, the short-term interest rate has remained within the lower limit of the corridor.

According to the 'Interest Rate Corridor Procedure - 2076', there is an arrangement to set the upper limit bank rate and the lower limit of deposit collection rate and keep the interbank interest rate in between. For this, there is a provision for the central bank to use various monetary instruments for liquidity flow and mopping excess liquidity.

According to Nepal Rastra Bank, as of last Thursday, banks have collected deposits of Rs 6167 billion and provided loans of Rs 5086 billion. In the fiscal current year, bank deposits have increased by Rs 396 billion, while credit flow increased by Rs 208 billion only. The average credit-deposit ratio (CD ratio) of banks is 80.04 percent. According to the provision that banks can provide loans by maintaining a CD ratio of up to 90 percent, they still have the capacity to provide loans of more than Rs 600 billion.