Kathmandu, November 17

Nepal Rastra Bank (NRB), the central bank, is all set to mop up excess liquidity that is likely to build up in the banking sector following the end of the festive season.

The banking sector is currently sitting on excess liquidity of around Rs 40 billion to Rs 50 billion, according to NRB.

The level of excess liquidity is expected to go up significantly in the coming days, as money withdrawn during festivals of Dashain, Tihar and Chhath, which recently concluded, finds its way back into banks and financial institutions.

“We believe around Rs 50 billion was withdrawn during these festivals. This money should flow back into the banking system within a month’s period,” said Min Bahadur Shrestha, chief of the Public Debt Management Department at NRB.

While return of the money used during festivals will flush the banking sector with cash, banks and financial institutions are not in a position to convert a large chunk of these funds into loans because of low credit demand.

One of the reasons for low credit demand is underutilisation of the capital budget. Because of this the treasury surplus has jumped to Rs 82 billion.

“Besides, there is not much demand for trade financing these days because of supply disruption at border points, which has reduced demand for credit instruments such as letters of credit,” Shrestha said. “Also, Nepalis working abroad are continuously sending money home, which is increasing the level of excess liquidity.”

So, to ensure stability in the financial sector, the central bank has no option but to float instruments to absorb the excess liquidity, Shrestha added.

In this regard, NRB has made an announcement to mop up Rs five billion on Wednesday through reverse repo. “We will introduce more instruments as excess liquidity continues to build up in banking system,” Shrestha said.

NRB has been actively using various instruments since the beginning of this fiscal year to mop up excess liquidity. NRB, for instance, has issued Rs 185 billion worth of term deposit instruments so far this fiscal year, which began in mid-July.