Liquidity pressure persists despite higher CRR requirement; NPR 369 billion parked at NRB

KATHMANDU, JUNE 3: The Nepal Rastra Bank (NRB) has seen a decline in the amount deposited by banks and financial institutions (BFIs) at it following the tightening of the Cash Reserve Ratio (CRR). Through the third quarterly review of the current fiscal year's monetary policy, NRB raised the daily minimum liquidity requirement from 70 percent to 90 percent. This move was aimed at reducing the central bank’s expenses related to managing excess liquidity.

Under the revised rule, BFIs are now required to maintain daily liquidity equal to 90 percent of their weekly CRR obligation, which is calculated as 4 percent of their total deposits. Previously, the daily requirement was set at 70 percent. This change has led to a slight reduction in the liquidity parked by banks at NRB, helping to lower interest expenses. However, despite this measure, the financial system continues to face liquidity pressure due to low credit demand and growing deposit volumes.

As of June 2, 2025, the BFIs had NPR 369.40 billion in surplus liquidity parked at NRB. Of this, NPR 112.75 billion was held under the Standing Deposit Facility (SDF) and NPR 256.65 billion through Deposit Collection Instruments.

In recent weeks, the BFIs have reduced their participation in these instruments. Last Monday, NRB issued NPR 70 billion in deposit collection instruments, but they only subscribed to NPR 44.40 billion for 20 days at an interest rate of 2.98 percent. Earlier, on May 28, the central bank received NPR 133.95 billion in bids from 27 banks for a 21-day NPR 80 billion offer but accepted only the targeted NPR 80 billion at an average rate of 2.80 percent. Similarly, on May 25, NRB received NPR 66.40 billion in bids for a NPR 30 billion offering and accepted only the full target amount at 2.96 percent interest.

Since the beginning of the current fiscal year, the BFIs have transacted NPR 2.693 trillion in deposit collection instruments over 78 operations. As of May 27, NPR 256.65 billion remained outstanding.

These institutions have also decreased their deposits in the SDF.  They deposited NPR 112.75 billion, compared to NPR 179.95 billion on May 27 and NPR 136.75 billion on May 25. So far this fiscal year, the BFIs have conducted 130 transactions through the SDF, amounting to NPR 17.881 trillion.

These deposits, typically placed for three days, earn 3 percent interest, which is the lower bound of the interest rate corridor set by the NRB. Although the SDF deposits cannot be counted towards CRR requirements, they are included when calculating the statutory liquidity ratio and the net liquid asset ratio.

The open market operations guideline allows NRB to offer the SDF facility three times a week—on Sundays, Tuesdays, and Thursdays.

Deposits surpass NPR 6.91 trillion; investable funds stand at nearly NPR 700 billion

Meanwhile, the total deposit base of BFIs has reached NPR 6.912 trillion, an all-time high. Of this, commercial banks account for NPR 6.177 trillion in deposits and NPR 4.926 trillion in loans, while other financial institutions hold NPR 735 billion in deposits and have issued NPR 618 billion in credit. Despite the large deposit base, credit expansion remains sluggish. With a current credit-to-deposit (CD) ratio of 79.05 per cent, banks have around NPR 677 billion in investable funds.

Long-term development bonds for liquidity management

To manage excess liquidity more effectively, the government now plans to issue long-term development bonds during periods of high liquidity. According to the implementation plan based on the High-Level Economic Reform Recommendation Commission’s report, the long-term projects will be selected within a year, and the Ministry of Finance will be responsible for issuing development bonds.

These bonds will only finance projects that promise returns higher than the prevailing market interest rates, and their maturity period will match the project timelines. The plan envisions using surplus liquidity in the banking sector for productive, long-term investments.