Banks Offering Less than 2.75% Interest on Savings Accounts Will Be Barred from One-Month Standing Deposit Facility
Summary of the News
Presented after review.
- After review, Nepal Rastra Bank has introduced some flexibility in the terms of Standing Deposit Facility, deciding that banks offering interest rates below the lower bound of the interest rate corridor on savings accounts will be denied this facility for one month.
- The central bank has also added provisions to regulations to implement a “Sterilized Intervention” system for liquidity management, which includes payments in foreign currency.
- By amending procedures related to open market operations, Nepal Rastra Bank has clarified processes concerning the deployment of monetary tools, distribution, and departmental authority.
June 14, Kathmandu – Nepal Rastra Bank has eased some conditions related to the Standing Deposit Facility. Banks and financial institutions that set interest rates on savings accounts below the lower limit of the interest rate corridor will be restricted from accessing the Standing Deposit Facility for one month.
In an amendment to the Open Market Operations procedure of 2021, the central bank has stipulated that banks and financial institutions issuing interest rates below the corridor’s lower bound will be denied the Standing Deposit Facility for one month. Previously, banks setting such low rates were completely barred from this facility. The current lower limit of the interest rate corridor stands at 2.75 percent.
While the central bank has not altered the interest rates for the upcoming fiscal year’s monetary policy, it has modified the Standing Deposit Facility conditions to assist banks and financial institutions in reducing their costs.
Additionally, necessary provisions have been added to regulations to implement a new “Sterilized Intervention” process for liquidity management. Under this system, foreign currency receipts will be paid out in the same currency, helping reduce liquidity issues caused by a decrease in the availability of Nepalese rupees in the market.
The regulations define “monetary instruments” as various tools issued for liquidity management, including domestic currency, government securities, Nepal Rastra Bank bonds, repo, reverse repo, deposit collection, outright purchase and sale, standing facilities, or other similar monetary instruments as determined by banks.
The regulation also requires that bids for instruments such as reverse repo and deposit collection prioritize the lowest interest rates. Allocation of funds will be managed by departmental heads based on bids up to the lower bound of the interest rate corridor. Information regarding such allocations must be promptly provided to the Open Market Operations Committee.
Nepal Rastra Bank’s Monetary Department is tasked with preparing quarterly reports on open market operations, liquidity levels in the banking system, average interest rates, and related topics for submission to the committee. These reports will also include a brief analysis of national and international financial markets and economic conditions. The committee will review and adjust the reports as necessary before submitting them to the Governor.
In cases of special economic or financial situations necessitating open market operations through any monetary instrument or excessive liquidity injection, the committee must inform the Governor via the relevant department.
The regulations specify limits for open market operations conducted through department decisions or committee resolutions: repo operations can have a balance of up to NPR 4.5 billion, and daily limits of NPR 1.5 billion apply to reverse repo and deposit collection instruments.
Department heads have full authority to approve, reject, or partially approve bidding related to these transactions. The department must promptly inform the committee about completed open market operations under their authority.
According to the monetary policy, standing liquidity facilities will be available at the upper limit of the interest rate corridor, overnight repo will be provided at the policy rate, and standing deposit facilities will be offered at the corridor’s lower limit. Currently, the upper limit of the interest rate corridor is 5.75%, the policy rate is 4.25%, and the lower limit is 2.75%.
The amended regulations state that if a counterparty reports offering interest rates on local currency savings or fixed deposits below the lower limit of the interest rate corridor for instruments such as deposit collection, Nepal Rastra Bank bonds, or Standing Deposit Facility, that entity will be ineligible to participate in these transactions or receive the facility for one month from the date of the report.
