KATHMANDU: Returns on development bonds floated by Nepal Rastra Bank (NRB) are continuously falling even as the maturity period of these securities is increasing.

This indicates the banking sector is sitting on a huge pile of cash, and bankers are willing to lend excess cash to the government at lower interest rates.

Since the last week of May, NRB, the central monetary authority, has floated development bonds worth Rs five billion each thrice.

When these securities were first floated this year on May 28, the weighted average interest rate stood at four per cent. The bonds offered at that time came with a maturity period of five years.

Then on June 4, NRB floated another Rs five billion worth of development bonds with a maturity period of seven years. At that time, the weighted average interest rate fell to 3.44 per cent.

When NRB floated another Rs five billion worth of bonds, with a maturity period of nine years, today, the weighted average interest rate further dipped to 3.08 per cent.

The declining yields indicate that banks and financial institutions are willing to lend money to government for a longer period at lower rates. In other words, the government, on whose behalf NRB is floating bonds, is being able to borrow money for a longer period at cheaper prices.

“All this is happening due to high level of excess liquidity in the banking sector,” said Nara Bahadur Thapa, executive director of Public Debt Management Department at NRB.

As of June 1, excess liquidity in the banking system hovered around Rs 76 billion. It then rose to around Rs 87 billion by June 4. Now, the excess liquidity in the banking sector stands at around Rs 100 billion.

Banks and financial institutions are sitting atop huge pile of cash because of rise in inflow of workers’ remittance and aid money in the aftermath of the earthquake.

Also, repayment of domestic debt by the government has raised liquidity level in the banking sector. The government intends to repay debt of Rs 42.55 billion this year, of which around Rs 31 billion has already been doled out.

While the government is rapidly repaying debt, it is also raising fresh debt of Rs 52.75 billion from the domestic market by the end of this fiscal year to finance reconstruction works.

In this regard, it has already floated Rs 2.5 billion worth of Citizens Saving Bonds and Rs 15 billion worth of development bonds.

While the Citizens Saving Bonds — meant for public — were undersubscribed by Rs 160.58 million, development bonds have always been oversubscribed. During today’s auction as well, development bonds of Rs five billion received bids worth Rs 37.65 billion. In other words, they were oversubscribed by over seven times.

Of the bonds available today, 80 per cent were in the form of competitive tender and the rest in the form of non-competitive tender. In other words, bonds worth Rs four billion were up for grabs through competitive bidding process and the remaining Rs one billion worth of bonds through non-competitive bidding.

Competitive bidding is open for banking institutions, like commercial banks, development banks and finance companies, as well as non-banking institutions, like insurance companies, Employees Provident Fund (EPF), Citizen Investment Trust and merchant banks. But non-competitive bidding is open only for non-banking institutions.

The bonds floated today in the form of competitive tender were oversubscribed by over nine times.

In other words, Rs four billion worth of bonds floated under competitive bidding process received bids worth Rs 37.05 billion from banking institutions.

On the other hand, Rs one billion of bonds floated as non-competitive tender received bids worth a mere Rs 600 million. Only two firms — EPF and Nepal Life Insurance Company — participated in today’s non-competitive bidding. Because of lower subscription, bids meant for non-banking institutions will now be issued to banking institutions.