August 19-KATHMANDU: A new liquidity-mopping instrument called 'term deposit' launched today by Nepal Rastra Bank (NRB) was oversubscribed by just 90 per cent,
surprising central bankers who were expecting better response from banks and financial institutions (BFIs).
Term deposit of Rs 20 billion floated today by NRB drew bids worth around Rs 38 billion — less than two times the floated amount — from 25 BFIs, an NRB source said.
Such a 'lethargic response' has come at a time when the banking system is said to have excess liquidity of around Rs 100 billion.
"The subscription rate contradicts calls made by bankers in the past to introduce instruments with longer maturity period to absorb excess liquidity," the source said. "This shows BFIs are not very keen to invest in this instrument."
What has also surprised central bankers is the average weighted interest rate of 0.69 per cent on the instrument.
"Compared to yesterday's average weighted interest rate of 0.0126 per cent on roll-over 91-day treasury bills, today's rate was way high, which indicates inconsistent bidding behaviour of bankers," the source said. "Such discrepancy may discourage the central bank from floating the instrument in the future."
Actually the central bank was expecting the rate on various tools to increase gradually.
"Yesterday's average weighted interest rate on treasury bills had gone up from the previous week's average rate of 0.002 per cent. So we were expecting average weighted interest rate on term deposit to hover around 0.05 per cent. But the sudden increment has surprised us," the source said.
The instrument called term deposit allows commercial banks, development banks and finance companies to park their money at NRB for a period of three months at interest rates fixed through auction.
The tool was introduced to provide some relief to BFIs that have been sitting on piles of cash, which does not give any return.
The banking sector has been facing the problem of excess liquidity for more than a year now due to increase in foreign income, especially remittance.
To deal with this problem, the central bank had earlier this fiscal said it would make its open market operations effective and efficient, so that it can mop up liquidity whenever needed.
In this regard, NRB is mulling over conducting regular open market operations, emergency fine tuning operations and strategic operations as mentioned in the new Open Market Operation Bylaw.
Last fiscal, NRB had mopped up Rs 611 billion from the banking system using short-term instruments like reverse repo of seven to 14 days and outright sale auction.