Nepal Rastra Bank (NRB) plans to start issuing the NRB bonds from the next week—a move aimed at addressing the prolonged excess liquidity situation in the banking system.

Excess liquidity occurs when banks hold more lonable cash than the market demand. In a such situation, interest rates go down and chances of capital flights are high as people find depositing in banks worthless.

The central bank plans to issue the bonds worth Rs50 billion this fiscal year and the first instalment of the issuance has been planned for the next week. “We will start the issuance of the first lot of the bonds next Sunday,” said Min Bahadur Shrestha, chief of NRB’s Public Debt Management Department. “A meeting of the Open Market Operation Committee scheduled to be held on Wednesday will decide the value of the bonds.”

Bankers have been demanding the central bank issue more debt instruments for investment. Currently, the central bank uses instruments repo, reverse repo, and deposit collection.

The government’s debt instruments such as treasury bills and development bonds also help in liquidity management. However, they have not been so effective in addressing the persistent excess liquidity problem.

Currently, the banking system is sitting on excess liquidity of around Rs30 billion, according to NRB.

“We have realised the banking system always faces excess liquidity in the last quarter of the fiscal year and subsequent first quarter of the following fiscal,” said Shrestha. “It is a systemic problem and the issuance of NRB bonds has been planned to address this problem.” 

As the liquidity absorbed through the NRB bond issuance will not be sent to the market unlike in the case of other instruments, the central bank believes it will help address the systemic problem. In the case development bonds, the funds also go to the market as the government spends.

As per the working procedure on NRB Bonds Issuance, the maturity period will be either six months or one year. Only commercial banks, development banks and finance companies can participate in the bidding. Bidder banks and financial institutions (BFIs) can quote multiple interest rates. 

NRB will maintain uniform interest rate for all the BFIs up to the issuance amount, while keeping the quoted interest rate of bidders in acceding order. 

BFIs cannot count the NRB bonds as the cash reserve ratio, but statutory liquidity ratio and liquidity ratio.