Nepal's Banking Sector Surpasses Rs 6 Trillion in Deposit Collection: Implications for Liquidity and Interest Rates

GP Chudal

Deposit collection of BFIs exceeds 6 trillion

Published: Feb 18, 2024
As of February 17, the banking and financial institutions (BFIs) in Nepal have amassed an impressive total deposit collection of Rs 6,161 billion, according to data released by the Nepal Rastra Bank (NRB).

Breaking down the figures, commercial banks have accounted for the lion's share, amassing Rs 5,446 billion, while other financial institutions have contributed deposits totaling Rs 714 billion.

The recent surge in deposit collection, coupled with sluggish loan disbursements, has led to a significant accumulation of liquidity within the banking system. Consequently, this surplus liquidity has exerted downward pressure on interest rates.

To address this liquidity imbalance, the NRB has initiated measures such as providing permanent deposit facilities to banks, aimed at absorbing excess liquidity from the financial system. However, these efforts have had minimal impact in maintaining interbank interest rates within the desired range, with rates dipping below 3 percent. Under the permanent deposit facility, banks can access funds at an interest rate of 3 percent twice a week.

In an effort to stabilize interbank interest rates, the central bank has introduced measures to make the interest rate corridor more effective. Despite prolonged efforts to bring interbank interest rates within the targeted range, rates remained persistently below the lower threshold. However, following the introduction of the permanent deposit facility, the interbank interest rate was recorded at 2.99 percent as of February 16.

Currently, BFIs are grappling with a surplus of liquidity, reflected in the loan-to-deposit (CD) ratio of banks, which has declined to 80.15 percent. This indicates that banks have over Rs 550 billion in investable funds, yet they have struggled to ramp up loan disbursements.

The burgeoning deposit collection in Nepal's banking sector underscores the need for effective liquidity management strategies to ensure the stability of financial markets and promote lending activities essential for economic growth.

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