Fiscal Nepal
First Business News Portal in English from Nepal
KATHMANDU: Nepal Rastra Bank (NRB) has adopted a new approach to manage the growing liquidity surplus in the banking system by extending the duration of its deposit collection instruments. With investable funds steadily increasing, the central bank has moved from its previous 21-day deposit collection method to longer-term tools to maintain the interest rate corridor above its lower limit, ensuring financial stability.
The banking system currently holds over NPR 750 billion in excess liquidity, driven by slow credit growth and a surge in remittances. Commercial banks alone have accumulated an additional NPR 218 billion in liquidity over the past three months. As the fiscal year-end nears, increased government payments and banks’ focus on loan recoveries are projected to further amplify this surplus. To address this, NRB has begun absorbing liquidity for periods exceeding two months, a shift from its earlier short-term strategies.
On Sunday, NRB invited bids for NPR 30 billion in 63-day deposit collections, following a similar call last Wednesday for NPR 50 billion, which received applications worth NPR 37.85 billion. The central bank initiated this long-term approach with a 42-day deposit collection on May 25, 2025. Currently, banks and financial institutions have parked NPR 456 billion with NRB through 3% interest deposit tools and standing deposit facilities (SDF).
The shift to longer-term liquidity absorption aims to prevent the interest rate corridor from dipping below its lower threshold, particularly as loan disbursement remains steady and declining interest rates fuel consumption and credit demand. The central bank projects that reducing the current NPR 450 billion liquidity surplus to NPR 150-200 billion will take time, necessitating extended deposit durations to keep deposit collection interest rates stable at around 3%.
This strategic pivot follows a period of significant liquidity growth since March 2025, prompting NRB to increase the volume of funds absorbed from the market. While short-term liquidity is managed through SDF, the use of deposit collection tools for over two months reflects a proactive effort to address the persistent surplus.
The central bank’s move is expected to stabilize the financial system as it navigates the challenges of excess liquidity driven by robust remittance inflows and cautious lending practices by banks, particularly as they aim to strengthen balance sheets ahead of the fiscal year-end. This policy adjustment underscores NRB’s commitment to maintaining economic balance in a dynamic financial environment.
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