Kathmandu, August 17

Nepal Rastra Bank’s presumption that the level of excess liquidity in a number of banking institutions may have depleted proved to be untrue today, as the central monetary authority’s decision to inject money in the banking sector received a lukewarm response from the banks and financial institutions.

NRB felt the pulse of the money market by floating two-week repo — an instrument used to inject liquidity in the banking sector — worth Rs five billion. Of this, instruments worth less than Rs 20 million were subscribed by BFIs, a senior NRB official told The Himalayan Times on condition of anonymity.

This was the first time NRB had launched repo since September 2011. The repo was launched under the recently-introduced interest rate corridor. This instrument carried an interest rate of 3.7223 per cent.

“Today’s response shows that the market still has excess liquidity,” said the NRB official. The market is said to have excess liquidity of around Rs seven billion at present.

One major reason that has flushed the banking sector with cash is money sent by Nepalis working abroad.

Although the growth of remittance income has been declining in recent months, BFIs are still receiving sizeable amount from aboard, which is replenishing their coffers.

Another reason that has lately been building liquidity is encashment of cheques issued by the government to contractors at the end of the last fiscal year.

Government generally settles a bulk of payments of contractors, who work on its behalf, in the last month of the fiscal year between mid-June and mid-July. These payments are settled using cheques. And all cheques issued by the government have to be encashed within a month of their issuance.

“Since the last fiscal year ended on July 15 and one-month period expired a day ago, contractors may have rushed to convert the cheques into cash, building liquidity in the banking sector,” the NRB official said.

Bankers also agree that BFIs are not short of cash at the moment.

“Although the level of excess liquidity is declining, it has not dried up. So, banks are in a comfortable position at the moment,” NMB Bank CEO and President of Nepal Bankers’ Association, Upendra Poudyal, said.

Around a year ago, BFIs were sitting atop excess liquidity of over Rs 100 billion.

Although NRB had floated instruments like reverse repo, outright sale and 90-day term deposit to absorb excess liquidity at that time, the situation had not improved and interest rates continued to remain depressed. Then in the end of May, NRB introduced a one-year instrument called NRB Bond and mopped up over Rs 49 billion in excess liquidity. This has helped reduce the portion of excess liquidity in the banking sector.

To further manage the liquidity situation, NRB, last week, launched interest rate corridor, under which open market operations would be conducted as frequently as possible.