| December 17, 2017
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NRB Bonds oversubscribed by three times

KATHMANDU, May 31: In a clear sign that the banking system is still grappled with excess liquidity, the Nepal Rastra Bank (NRB) Bonds issued by the central bank for the first time in nearly two decades has generated an overwhelming response from bank and financial institutions (BFIs).

'NRB Bonds' is a monetary tool deployed by the central bank to absorb excess fund from the banking system for a relatively longer time.
While the NRB has already introduced short terms instruments like Reverse Repo, Deposit Auction, 'NRB Bonds' was issued after nearly two decades. Reverse Repos hold the fund of the BFIs for a week, while deposit auction has a maturity period of 90 days. BFIs can park their excess cash in 'NRB Bonds' for one year.

The 'NRB Bond 2074 A' offered by the central bank for an amount of Rs 10 billion was oversubscribed by more than three times to Rs 31.33 billion. A total of 33 BFIs have submitted 194 bids to stash their excess loan-able fund at the central bank.

"The oversubscription means BFIs are sitting on a huge cash pile, indicating that either there has not been much demands for the loans or BFIs have failed to boost their credit flow," Min Bahadur Shrestha, an executive director of NRB who heads Public Debt Management, said.

The average interest rate of 'NRB Bonds' was, however, fixed at 0.98 percent which is higher than the average interest rate of 0.072 percent for reverse repo, another type of monetary instrument, of Rs 10 billion held on last Wednesday. "Since BFIs put the fund in this instrument for one year, the interest rates can be higher than other short term instruments," added Shrestha.

Funds mopped up through such instruments remains largely unused at the central bank vault.

NRB paid a total of Rs 659 million in the nine months of the current fiscal year alone for Rs 471.64 billion that it mopped up until mid-April.

According to the central bank, banking system still has liquidity surplus of around Rs 30 billion. Shrestha told Republica that the central bank was planning to issue 'NRB Bonds' of Rs 40 billion in the current fiscal year.

Bankers say that the loans have failed to pick up in line with the rise of deposit volume due to low demands from the investors who are still on wait-and-watch mode to make investment despite low borrowing cost. They point out recent problems like earthquake, Tarai turmoil, economic blockade by India, supply disruptions and other political uncertainty as the factors that have discouraged investors.
Sagar Ghimire

Ghimire is associated with Republica, English National Daily, since November 2013. He reports and writes on banking, financial, cooperatives, labor and foreign employment issues.

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