After ten years, Nepal Rastra Bank has once again started issuing bonds almost daily.
With excess liquidity building up in banks and financial institutions, the central bank — which had previously only been collecting deposits — has changed its strategy for liquidity management.
As a result, bond issuance has begun rapidly after a decade. On Monday, the Rastra Bank issued one-year bonds worth Rs. 25 billion, and again on Tuesday issued bonds worth Rs. 20 billion. In the 15 days of the month of Poush alone, the bank has issued bonds eight times, totaling Rs. 180 billion.
Under the current monetary policy, Nepal Rastra Bank was allowed to issue bonds of up to Rs. 200 billion to manage structural liquidity in banks and financial institutions.
Accordingly, within just the last 15 days, bonds worth Rs. 180 billion have already been issued, leaving only Rs. 20 billion remaining under the quota. Executive Director and Spokesperson of the Rastra Bank, Guru Prasad Paudel, said the central bank has adopted a long-term liquidity absorption measure, anticipating that the excess-liquidity situation may persist.
He explained that, “Previously, liquidity absorption was done through standing deposit facilities and deposit collection, but now long-term liquidity management is being carried out through bonds.”
He also clarified that these bonds should not be misunderstood as being issued for investment in other sectors.
The Rastra Bank stopped deposit collection from Poush 13 and began absorbing liquidity for one year. On Poush 13, the bank collected Rs. 20 billion in deposits, and from Poush 14 onward it started issuing bonds.
Bonds worth Rs. 25 billion each were issued on Poush 14, 16, 20, 22, and 28, while bonds worth Rs. 20 billion were issued on Poush 23 and 29, and Rs. 10 billion on Poush 24.
Across these eight issuances, when the Rastra Bank offered bonds worth Rs. 155 billion to banks and financial institutions, they submitted applications to invest nearly Rs. 400 billion. In 15 days, banks and financial institutions expressed interest in investing Rs. 388 billion for one year at interest rates as low as 2.64 percent, but the Rastra Bank accepted only Rs. 155 billion.
Previously, such bonds were issued in fiscal year 2053/54, and later in 2071/72. After that, the bank had not issued such bonds until it began issuing one-year bonds again frequently from Poush.
For the past two years, Nepali banks and financial institutions have been facing the problem of excess liquidity. They currently hold around Rs. 1,200 billion in liquid assets, which are investable funds. Because the economy has not become fully active and remains sluggish, loan disbursement has declined. As lending has fallen short of expectations but deposits continue to grow, deposits are increasing while loans are decreasing.
To help banks and financial institutions address excess liquidity, Nepal Rastra Bank had been issuing monetary instruments frequently to absorb money. Through deposit collection alone, at minimum interest of 2.47 percent, it absorbed Rs. 1,860 billion over the last five months in 40 rounds. Similarly, through standing deposit facilities, it absorbed Rs. 2,626.8 billion in 67 rounds.
While the central bank had earlier been absorbing liquidity for the short term, from Poush 14 it shifted strategy and began issuing bonds.
Generally, deposits refer to funds that banks and financial institutions place in the central bank’s account at minimal interest when they have excess money.
Bonds, on the other hand, are a type of financial instrument in which investors receive principal and interest from the issuing institution after a specified period. Both instruments absorb liquid assets from the banking and financial sector.
However, bonds are issued with a clear investment-management purpose. Expecting that excess liquidity may persist, Rs. 180 billion is being “held” for one year. For this, the Rastra Bank must pay banks and financial institutions interest ranging from 2.64 percent to 2.71 percent.
