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Tuesday, December 13, 2011

Treasury Bill in Nepal

1.          Introduction of Treasury Bill in Nepal

     Treasury Bill, popularly known as T-bill is one of the most widely used short term money market instruments in Nepal.

     A treasury bill is a short term money market security issued by the Public Debt Department of the Nepal Rastra Bank (NRB) on behalf of the Nepalese government, to fulfill its short term financial requirement.

     It has term to maturity ranging from 27 days to 364 days.

    It is one of the safest securities since it has zero default risk (being a government security or sovereign paper) and is also the most marketable or tradable security in Nepalese money market.

    The Treasury Bill are issued with a minimum denomination of Rs 100000 and goes up from that minimum in increments of Rs. 5000.

    The chief demanders of Treasury bills are Nepal Rastra Bank, Commercial Banks and others. The Central Bank, NRB is the biggest financer of Treasury Bills (with 23.59% as of November 22, 2009).

    The treasury bills in Nepal are issued weekly or monthly especially the 52-weeks treasury bills are issued bi-monthly i.e. twice a month. However the most common type of T-bill used in Nepal is the 91-days, 182 days and 394 days T-bills.

    The treasury bills in Nepal are issued on a discounted basis. Hence the return to the investor is the difference between the maturity value and the issue price.

Calendar of Auction as announced by Nepal Rastra Bank


 The Treasury Bills are sold by holding auctions on Mondays and Bids are submitted during a specified period of time and the delivery is made on the following Thursday.


Auction Day                                                       Delivery Day

Monday                                                                    Thursday

 Classification of bids


The bids submitted can be classified as competitive and non competitive bids.

  •     Competitive Bids: Competitive bids are those bids which can be submitted by any person or institutions in Nepal who specify the desired quantity of bills and the lowest interest rate the buyer is willing to accept.
  •   Non Competitive Bids: Non-Competitive Bids are those bids which are alloted to specific institutions. In Nepal, Employees Provident Fund, Citizen Investment Trust(CIT), Insurance Companies, Cooperatives and others get allocation of about 15 percent of the notified amount at the weighted average rate of accepted bids.

2.          History of Treasury Bill in Nepal

The history of Treasury Bill dates only half a century back. The first T-bill issued in Nepal was the 90-days Bill which was issued in 1962(2029 B.S) as Public Debt under the Public Debt Act 1960. The NRB issued this t-bill at the interest rate of 1% amounting to Rs. 7 million. Since then the NRB has issued many treasury bills to meet the budget deficits and to refinance maturing government debt.

Since 1990 the monetary policy shifted its attention from direct to indirect methods of control, especially it placed paramount  emphasis on the Open Market Operations (OMO) as the main policy instruments to contain monetary aggregates within the targeted level. The OMO Committee constituted in the NRB thus started to decide the amount of issue, the  type of securities, the interest rates of securities, the maturity date of the securities, etc. but later in November 1988 the Treasury Bill Auction system was introduced to determine market oriented interest rates.

Moreover, to make the government securities market more attractive and active, NRB started to operate Secondary Market for Treasury Bills (and NRB bonds) since the fiscal year 1994/95. All commercial bankers and  market makers have been actively participating in the secondary market.

The investments in the T-bills have also increased over the decades. The table below shows the total investment in T-bills through year 1962 to 2007.

Year
Total Investment(Rs in million)

1962
7

1985
2830

2002
41106.5

2003
4864

2004
49429.6

2005
51381.1

2006
62970.3

2007
700431.3


1.          Term Structure of Treasury Bill in Nepal 
Since Treasury Bill is a short term instrument for government, the amount(quantity) of T-bills to be issued at the weekly auction(on Mondays), Is determined by the short term liquidity position of the Government and the interest rate(price) is determined by the overall liquidity position in the market. Earlier this was not the case, and the OMO Committee (Open Market Operations Committee) did all fixing of interest rates but the Treasury Bills Auction System has been effective in determining the market oriented interest rates.

Since then, the Nepalese T-bills have witnessed a number of changes in its interest structure.The Changes in the Weighted Average Treasury Bills Rate for 91 days bills and 364 bills are shown in the table and figure below:
Weighted Average Treasury Bills Rate (91-day)


Fiscal Year
 Fiscal Year
Annual Weighted

Average Rate(Percentage)

2048/49
1991/92
9.24

2049/50
1992/93
11.34

2050/51
1993/94
6.50

2051/52
1994/95
7.35

2052/53
1995/96
10.93

2053/54
1996/97
10.22

2054/55
1997/98
3.52

2055/56
1998/99
2.33

2056/57
1999/00
4.66

2057/58
2000/01
4.96

2058/59
2001/02
4.71

2059/60
2002/03
3.48

2060/61
2003/04
2.93

2061/62
2004/05
2.46

2062/63
2005/06
2.84

2062/63
2006/07
2.42

2062/63
2007/08
3.33

\s

Weighted Average Treasury Bills Rate (364-day)



Fiscal Year
Fiscal Year
Weighted Annual

Average(Percentage)

2053/54
1996/97
10.34

2054/55
1997/98
6.86

2055/56
1998/99
5.13

2056/57
1999/00
6.16

2057/58
2000/01
5.26

2058/59
2001/02
5.20

2059/60
2002/03
4.71

2060/61
2003/04
4.15

2061/62
2004/05
4.32

2062/63
2005/06
3.95

2062/63
2006/07
3.50

2062/63
2007/08
3.33




NOTE: While speaking about the more recent interest rate structures, the short term interest rates remained slightly higher in mid-june 2011 compared to mid-june 2010. For eg the weighted average 31 day Treasury bill rate stood at 8.34 percent in the mid june 2011 compared to 6.77 percent in mid june 2010.



Deployment of the funds collected through Treasury Bill in Nepal

Treasury bill is a powerful instrument use by the government to cover budget deficits and refinance maturing government debt. Every year the NRB collects funds amounting to millions of rupees by issuing Treasury Bills and then deploys this large amount of funds into two chief areas:

Deployment of Treasury Bill as a Deficit Instrument

        Treasury Bills are the most popular Budget Deficit instruments used in Nepal. It forms a large part of the INTERNAL DEBT of the country. The Public Debt Department of NRB issues Treasury Bills and Development bonds and borrows billions of rupees to cover or fulfill the budget deficit of the country. For example in 2009 the Treasury bills formed 71.59 percent of the total Internal Debt (71.59% of Rs.30.91 billion=Rs 22.128 billion) whereas Development Bond formed 24.39%.

Deployment of Treasury Bill in the Liquidity Management 

Treasury bill is used by the government to manage the liquidity in the market. If there is excess liquidity with the banks, i.e., in the market, the NRB injects/issues T-bills to mop the liquidity. Similarly if there is deficit liquidity with the banks i.e., in the market, the NRB introduces another powerful instrument called Repo (Repurchase Agreement) and Reverse Repo and buys back the previously issued T-bills. Thus T-bills, operating through repo and reverse repo auctions, have contributed significantly in the short term liquidity management of the country (i.e. managing the day to day mismatches in the system) as well as led to further deepening of government securities market and providing signal to the market through the repo rate.


Deployment of Treasury Bill to refinance maturing government debt
Another important use of T-Bills-generated funds is for the repayment of maturing government debt. The Nepalese Government takes loans/debt from many sources such as International Monetary Fund (IMF), Asian Development Bank (ADB) and other foreign countries. When these loans mature, the Government repays them by borrowing funds from the public by issuing T-bills.

Deployment of Treasury Bill for Industrial Development

          Besides these, the T-Bills are also used to generate funds to invest in the areas of industrial development such as for Hydroelectricity Projects, etc.







                                                               





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