Why Development Bonds issued by NRB has been oversubscribed lately?

ShareSansar June 18:

NRB has issued three development bonds worth Rs 15 billion (5 billion each) in the span of last 15 days.

Development Bond with a maturity of 5 years named “Development Bond 2077” issued on Jestha 14 collected Rs 37.33 billion which is 7.46% times more than the bond amount and the interest rate for it was 4%. Whereas “Development Bond 2079” issued on Jestha 21  with a maturity of 7 years collected Rs 42.24 billion which is more than 8.44 times than the bond amount and the interest rate for it stood 3.44%. Similarly, “Development Bond 2081” issued on Jestha 28, 2072 with a maturity of 9 years collected Rs 37.64 billion which is 7.52 times than the bond amount and the interest rate for it fixed was 3.08 %.

ShareSansar.com met Nara Bahadur Thapa, Executive Director of Public Debt Management Department to find out why have the development bonds been oversubscribed and what has driven down the interest rates?

He gave 3 most significant reasons and they are:

1.    Excess Liquidity:  The most prominent reason is excess of liquidity. The banking system has RS100 billion of excess liquidity (commercial banks, development banks, and finance companies taken together) and it is continuously increasing.One week earlier the liquidity stood at Rs 87 billion and one week later it stood at Rs 100 billion, which is almost all time high. In access of maintaining 6% CRR (Cash Reserve Ratio) with the central bank, the BFIs are holding more than Rs100 billion excess money in their system.Hence, the driving force of the falling interest rate is excess liquidity.

2.    The Outlook: Second reason is the outlook or the prospect of the BFIs towards the macroeconomic activities of the country. Seeing the present economic scenario, BFIs seems skeptic towards credit demand for a year or six months’ time horizon. The present situation is such that excess liquidity will continue to increase in the days to come because of the earthquake. The relief money is coming from all over the world to help the affected people of the earthquake. Also, the government has banned the land transfer transactions for this fiscal year. Nevertheless, Inactive economic activities has a direct impact in the less credit off-take from the banks. Deposits and remittance are induced whereas there has not been much supply of the loans.

3.    Value of the dollar:  The dollar is also appreciating vis-à-vis Nepalese rupees.  Presently NPR is Rs 103 against one US dollar. The local currency liquidity will go up because of the exchange rate depreciation that will also add liquidity to the system.  Therefore, credit off-take stagnating, deposit increasing ultimately led to vault of the commercial banks bulging.