NRB to Issue Rs 25 Billion in Bonds to Absorb Excess Liquidity

Kathmandu : With excess liquidity persisting in the banking system, Nepal Rastra Bank (NRB) has announced that it will issue bonds worth Rs 25 billion today (Sunday) as part of its liquidity management measures.

According to NRB, a one-year Nepal Rastra Bank Bond 2083 ‘Ga’ will be issued through an auction process. The central bank had earlier issued bonds of the same tenor and amount on Poush 16. However, as surplus liquidity continues to accumulate in the banking system, NRB has decided to issue an additional Rs 25 billion worth of bonds with identical maturity and tenure.

The interest rate on the bonds will be determined through a competitive bidding process. Only NRB-licensed Class ‘A’, ‘B’, and ‘C’ banks and financial institutions (counterparties) will be eligible to participate in the auction. Interested institutions must submit their bids by 2:00 PM on Sunday, Poush 20.

The principal and interest payments will be made on Poush 20, 2083. Interest will be paid on a semi-annual basis.

Participating counterparties must specify the amount they wish to bid for and the proposed interest rate, up to four decimal places. Bids will be ranked from the lowest to the highest interest rate, and a single cut-off interest rate will be determined based on the total amount announced or within the limits set by the Open Market Operations Committee. Bonds will be allocated to institutions bidding at the cut-off rate or below.

If bids at the same interest rate exceed the total issuance amount, allocation will be made on a pro-rata basis. NRB has stated that the Open Market Operations Committee reserves the right to accept or reject bids either partially or fully.

The approved bid amounts will be debited from the respective counterparties’ accounts held at NRB on the issuance date. If sufficient balance is not available in the account on that date, the approved bid will be automatically cancelled. In such cases, the concerned institution will be required to pay a penalty of 2.5 percent of the cancelled amount and will be barred from participating in open market operations and interest rate corridor-related auctions for six months.

As per the bond issuance terms, interest payments during the bond tenure and principal repayment at maturity will be credited directly to the counterparties’ accounts at NRB.

Since the approved amount will be included in the institutions’ investment portfolios, it cannot be counted toward the mandatory cash reserve requirement. However, the amount may be included in the calculation of the statutory liquidity ratio and net liquid assets ratio, as per NRB directives.

NRB will issue bond certificates to purchasing counterparties in accordance with Schedule–9 of the NRB Open Market Operations Directive (Seventh Amendment), 2078. The certificates will be automatically cancelled after the principal and interest are fully settled at maturity, the central bank said.