What it is
Just as a bank lends spare cash to other banks, it also borrows from them when it is short. Other institutions may also keep deposit accounts with it.
This is usually short-term funding. It is less stable than customer deposits because another bank can pull its money quickly.
A bank that relies heavily on interbank money is more exposed when the market tightens.
How it is calculated
Sum of borrowings from, and deposits placed by, other licensed BFIs.
Worked on Nabil Bank Limited, FY 2082/83 Q4
NABIL owed Rs 1,036.81 crore to other BFIs at the end of FY 2082/83 Q4, compared with customer deposits of Rs 59,255.94 crore.
What good looks like
Small relative to customer deposits. A rising share means the bank is leaning on wholesale funding, which is dearer and less stable.
Watch out
- Interbank money can vanish in a liquidity squeeze.
- It is a liability; do not mix it up with 'Loans to BFIs' on the asset side.
- It usually costs more than ordinary savings deposits, which pushes up the cost of funds.
In Nepal
Nepal's interbank market tightens visibly when the system is short of loanable funds. Interbank rates are published daily by NRB; a bank that borrows a lot here when rates spike will show a higher cost of funds.
Questions
To cover a short-term gap, for example when loan demand runs ahead of deposits or on a day of large withdrawals.
It can be. Interbank money is short-term and can leave fast, so a bank leaning on it is more exposed when liquidity tightens.