In a bid to mop up excess liquidity in the banking system, Nepal Rastra Bank (NRB) has begun homework on issuing NRB bonds.

The central bank had opened the door for such bonds in the Monetary Policy 2014-15 along with the deposit collection instrument, but this is the first time it is considering issuing the bonds.

Amid high deposit mobilisation, increased remittance inflow and low credit disbursement, the banking system has been witnessing excess liquidity (Rs45 billion as of Monday) for the last three years.

“We have started an exercise for the issuance of the NRB bonds,” said NRB Deputy Governor Gopal Prasad Kafle.” It will, however, be the last option. We will issue it only after existing instruments such as deposit collection, reverse repo, and the government’s debt instruments such as development bonds, citizen saving bonds and treasury bills.”

NRB plans to issue the bonds in small amount, but frequently, so that banking system would not have to face a sudden liquidity crunch, Kafle said. “As the maturity period of the bonds will be longer, we have to be careful about the possibility of sudden liquidity crunch,” he said.

The deposit collation instrument matures in three months.

NRB has so far mopped up Rs178 billion through the deposit collection instrument this fiscal year. It has also absorbed Rs85.3 billion through reverse repo (one-week maturity).

Bankers say more absorption of liquidity by the central bank is necessary amid low credit demand. “Loan demand at our bank has stagnated, although our target was to increase our lending by 15-16 percent this fiscal year,” Rastriya Banijya Bank CEO Krishna Prasad Sharma said.

He said the NRB bond was a good idea, but added, however, that considering the possibility of higher liquidity needs in the future, deposit collection was the best option.