The Treasury Bill (T-Bill) market in Nepal is primarily regulated by the Nepal Rastra Bank (NRB), and it plays a crucial role in managing the government's short-term borrowing needs and in helping commercial banks manage their liquidity. Below is an in-depth explanation of the T-Bill process in Nepal with key data.

 1. Issuance of T-Bills

T-Bills are short-term debt instruments issued by NRB on behalf of the government to meet temporary liquidity needs. These instruments are issued with maturities typically ranging from:

28 days

91 days

182 days

364 days

These maturities allow the government to finance its operations without relying on long-term debt and give investors a relatively low-risk investment option.

 2. Auction Process

The issuance of T-Bills in Nepal is done via an auction process, which is conducted by NRB. The auction process follows two formats:

Competitive Bidding: Large institutional investors, such as commercial banks, participate by submitting bids with the interest rate (discount rate) they are willing to accept. NRB allocates T-Bills to the highest bidders until the issue amount is exhausted.

Non-Competitive Bidding: Smaller investors, such as individual or small institutional investors, can participate without specifying an interest rate. They receive T-Bills at the weighted average discount rate from the competitive bidding process.

 Example of Competitive Bidding Data (as of recent T-Bill auction in Nepal):

Total T-Bills issued: NPR 5 billion

Maturity Period: 91 days

Competitive Bids Received: NPR 8 billion

Cut-off Yield (Interest Rate):  3.50% (weighted average yield from competitive bids)

Weighted Average Discount Rate: 3.25%

In this example, NPR 5 billion worth of T-Bills was issued, but total bids were NPR 8 billion, meaning that the demand exceeded supply. The cut-off yield was set at 3.50%, while the average discount rate for all successful bidders was 3.25%.

3. Discount and Yield Mechanism

T-Bills are issued at a discount to their face value, meaning that investors buy the bills at a lower price than their maturity value. The difference between the purchase price and the face value is the investor’s return, known as the discount.

For example:

Face Value of T-Bill: NPR 1,000,000

Purchase Price: NPR 970,000 (bought at a discount)

Discount/Interest Earned: NPR 30,000 (the difference between face value and purchase price)

Maturity Period: 91 days

The yield is calculated using the following formula:

 4. Maturity and Payment

On the maturity date, the  NRB  pays the face value of the T-Bill to the investor. In the example above, the investor would receive NPR 1,000,000 after 91 days for an initial investment of NPR 970,000.T-Bills are short-term investments, so investors can expect to receive their returns within a few months, depending on the maturity period chosen (28, 91, 182, or 364 days).

5. Participants in the T-Bill Market

In Nepal, participants in the T-Bill market include:

Commercial Banks:The largest buyers of T-Bills, as they use them for liquidity management and as collateral for borrowing from NRB.

Development Banks and Financial Institutions: Smaller financial institutions also participate in T-Bill auctions.

Corporate and Individual Investors: Although less common, high-net-worth individuals and corporations can also participate via non-competitive bidding.

 6. Secondary Market

The secondary market for Treasury Bills in Nepal allows investors to trade T-Bills after they are issued in the primary auction by the Nepal Rastra Bank (NRB). This market provides a platform for investors, particularly commercial banks and financial institutions, to manage liquidity by buying or selling T-Bills before their maturity.

Key Highlights:

Purpose of Secondary Market: It provides liquidity, allowing investors to sell T-Bills if they need cash before maturity and offering others an opportunity to invest after the primary auction.

Market Participants: Primarily commercial banks, financial institutions, and occasionally corporate and individual investors. Banks are the most active participants, using T-Bills to meet their liquidity and regulatory requirements.

Trading Process: T-Bills are traded over-the-counter (OTC), where buyers and sellers negotiate prices based on interest rates, time to maturity, and liquidity needs. Settlement occurs through Central Depository System and Clearing Ltd. (CDSC).

Liquidity: The secondary market in Nepal is relatively less liquid compared to the primary market, with most trades dominated by financial institutions. Liquidity depends on factors such as interest rate movements and the size of T-Bill issues.

Price and Yield: T-Bills are traded at a discounted price, reflecting the time remaining until maturity. The buyer's yield depends on the purchase price and time left to maturity.

Challenges: Low market activity, limited participation from non-bank investors, and dominance of financial institutions contribute to reduced liquidity in the secondary market.

7. Example of T-Bill Issuance Data in Nepal (2024):

Breakdown of the Data:

• T-Bill Type: This indicates the maturity period of the T-Bills (e.g., 28 days, 91 days, etc.).Auction Date: The specific date when the T-Bill auction was held. Maturity Period: The duration until the T-Bill matures, indicating how long the investor will hold the bill before receiving the face value. Total Issued (NPR): The total amount of T-Bills issued during that auction. This reflects the government's borrowing needs for that specific period. Cut-Off Yield (%): The highest yield accepted in the auction for competitive bids. This percentage reflects the discount rate at which T-Bills are sold. Weighted Average Yield (%): The average yield for all successful bidders in the auction, providing an overall sense of the market's return expectations

  8.Settlement and Custody:

  The settlement and custody of Treasury Bills (T-Bills) in Nepal are essential for ensuring the secure transfer of ownership and management of these financial instruments. The processes involved are designed to facilitate efficient trading and enhance investor confidence.

Key Highlights:

Settlement Process:

Trade Execution: Buyers and sellers agree on the terms of the T-Bill trade.

Clearing and Settlement: Managed by the Central Depository System and Clearing Ltd. (CDSC), which confirms trades and prepares for ownership transfer.

Transfer of Ownership: Once payment is confirmed, ownership is updated electronically in the buyer's demat account.

Settlement Timeline: Typically occurs within one or two business days after the trade date.

Custody of T-Bills:

Dematerialization: T-Bills are held in electronic form, reducing risks associated with physical certificates.

Central Depository System (CDS):

Maintains accurate records of T-Bill transactions and holdings.

Facilitates smooth ownership transfers and corporate actions (e.g., interest payments).

Investor Access: Investors can monitor their holdings through their brokers or financial institutions.

Benefits of Electronic Settlement and Custody:

Efficiency: Faster transactions and reduced complexity in trading T-Bills.

Reduced Risk: Minimizes risks related to physical securities (e.g., fraud or loss).

Transparency: Centralized record-keeping enhances trust and reliability.

Easy Access to Information: Investors have improved visibility of their T-Bill holdings and transaction history.

9. Taxation

In Nepal, the interest earned from T-Bills is considered income and is subject to taxation. Investors need to account for tax implications when calculating the net return on their investment.

Key Highlights:

Interest Taxation: Interest from T-Bills is taxable as income.

Tax Rate: Tax rates depend on individual or corporate income brackets as per Nepal’s tax laws.

Withholding Tax: Possible withholding of tax at the source by financial institutions.

Net Return Consideration: Investors must account for tax implications when calculating net returns.

Professional Guidance: Consulting tax professionals is recommended for compliance and optimal tax planning.

10. Importance of T-Bills in Nepal

T-Bills provide the government with a mechanism to meet short-term liquidity requirements.

They allow the government to raise funds without incurring long-term debt obligations.

Monetary Policy:

T-Bills assist the Nepal Rastra Bank (NRB) in controlling liquidity within the banking system. They play a key role in managing short-term interest rates, influencing overall monetary stability.

Risk-Free Investment:

T-Bills are considered a low-risk investment option, making them attractive for financial institutions and conservative investors. They provide a secure way to preserve capital while earning returns.

Key Highlights:

Short-Term Financing: Helps the government manage immediate financial needs without long-term commitments.

Monetary Control: A tool for the NRB to regulate money supply and interest rates.

Low-Risk Investment: Attracts investors seeking stability and security.