BFIs shift focus to short-term instruments amid rising loan demand

KATHMANDU, MARCH 3: Banks and financial institutions (BFIs)  in the country are increasingly allocating surplus funds to short-term instruments issued by Nepal Rastra Bank (NRB) as they face challenges in expanding credit. With a recent uptick in loan demand, the BFIs have prioritized investments in the Standing Deposit Facility (SDF) over long-term deposit collection.

To regulate liquidity in the financial system, NRB employs liquidity absorption instruments, accepting deposits for durations ranging from 7 to 22 days, while the SDF facility is available for only three days. As the credit demand grows, the BFIs are strategically shifting their liquidity management approach by favoring short-term investments over long-term placements.

The central bank ensures that the interbank interest rate does not fall below 3% through its deposit collection instruments, where interest rates are determined via an auction process. Recent data indicate that the BFIs have been consistently bidding at a 3% interest rate for these instruments.

Yesterday, NRB aimed to absorb Rs. 25 billion through a 21-day deposit collection instrument; however, the BFIs deposited only Rs. 14.7 billion at a fixed interest rate of 3%. Similarly, earlier on February 25, the central bank had announced a 22-day deposit collection of Rs. 25 billion, but the financial institutions submitted only Rs. 9.8 billion at the same rate.  Still, prior to this, on February 23, NRB had sought to absorb Rs. 30 billion, yet the BFIs deposited only Rs. 16.2 billion.

Since the beginning of the Falgun month (mid-February to mid-March), NRB has issued five separate calls for deposit collection. Still, the BFIs have not fully subscribed to these offerings. Instead, they seem to have been significantly increasing their participation in the short-term SDF facility. Yesterday alone, these institutions invested Rs. 89.15 billion in SDF, up from Rs. 70.6 billion on February 27 and Rs. 62.4 billion on February 25. This trend suggests an increasing preference for short-term liquidity management, aligning with the growing demand for credit expansion.

According to NRB, as of March 1, the banking system held excess liquidity of Rs. 84.67 billion. Additionally, a total of Rs. 233.40 billion (comprising Rs. 144.25 billion in deposit collection instruments and Rs. 89.15 billion in SDF) remains pending for release to banks.

As of the latest data, banks have accumulated Rs. 6.72 trillion in deposits and disbursed Rs. 5.43 trillion in loans, maintaining an average credit-to-deposit (CD) ratio of 79.69%. Given the regulatory allowance to extend the CD ratio up to 90%, the banking sector retains the potential to expand lending by over Rs. 600 billion, indicating further room for credit growth in the coming months.

 

 

 

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