The government is mulling over making a pot of up to Rs80 billion available to banks and financial institutions that are facing shortage of funds to expand lending.

The Ministry of Finance is planning to make this move following banking institutions’ complaints that slow government spending, especially capital spending, had hit deposit collection, thereby creating shortage of funds that could be immediately extended as loans.

The government’s capital expenditure stood at 12.6 percent of the total annual allocation of Rs335.2 billion as of Thursday, or almost six months into this fiscal year. The inability to make timely use of capital budget, which is largely spent in infrastructure development, has massively raised the government’s savings, with treasury surplus soaring to Rs328.8 billion as of December 29, as against Rs202.1 billion in the same period a year ago.

Of this surplus, the government can immediately spend Rs102.2 billion on budgetary programmes, show the data of the Banking Office of the Nepal Rastra Bank, the central bank. The surplus also contains a balance of Rs127.7 billion carried forward from the last fiscal year due to inability to make full use of budget.

The remaining Rs98.9 billion is in the form of guarantee deposits or deposited in VAT fund account, customs fund account, reconstruction fund account and local authority accounts, among others.

 “We can tap Rs70 billion to Rs80 billion from this pool of fund and make it available to banks and financial institutions facing shortage of loanable funds,” a high-ranking official of the Ministry of Finance said.

This is the initial recommendation made by the taskforce formed to look into ways to channel government’s surplus funds to banks and financial institutions.

The taskforce formed under Ram Sharan Pudashaini, head of the Economic Policy Analysis Division at the Finance Ministry, is expected to formally submit its recommendations on Sunday, following which the government will introduce a short-term measure to ease the pressure on banks and financial institutions that are facing severe shortage of funds that could be immediately disbursed as loans.

Central bank Spokesperson Narayan Prasad Paudel, who is also a member of the taskforce, confirmed that a pot of Rs70 billion to Rs80 billion could be made available to banking institutions facing shortage of loanable funds.  

But he did not mention the ways through which the fund can be transferred.

“We are still discussing the options,” Paudel said, adding, “One way could be through signing of an agreement between the Finance Ministry and the central bank for fund transfer. The central bank can then sign agreements with banks and financial institutions that need money.”

The central bank generally injects funds into the banking system whenever there is liquidity crunch. But the money market instruments used by the central bank to funnel money into the banking system help banking institutions to maintain 20 percent regulatory liquidity ratio, which cannot be used for the purpose of credit disbursement.

Banking institutions are now looking for instruments that can help them expand loans.

One suggestion laid by the bankers to transfer the government’s surplus funds to the banking system was through refinancing facility. This, according to them, would enable good borrowers to increase investment in the productive sector, such as physical infrastructure, tourism and small and medium enterprises.

Under the general refinancing facility, the central bank offers credit to banks and financial institutions at 4 percent interest. Banks and financial institutions then offer funds to borrowers at interest of up to 9 percent.

But Paudel ruled out the possibility of channelling funds through refinancing facility. “It has tenure of up to a year, which is pretty long,” Paudel said. “We are looking at stopgap measures....something with tenure of one month to a maximum of three months.”

This is the first time in Nepal’s recent banking history that the government itself has decided to come to the aid of banking institutions to ease the problem triggered by shortage of loanable funds. This, according to a school of thought, is pretty weird in a free market economy and would set a bad precedent, encouraging banking institutions that dig themselves into a hole to seek relief packages in the future as well.  

Banks and financial institutions are currently facing severe shortage of loanable funds because of mismatch in deposit collection and credit disbursement. Commercial banks added Rs112.7 billion to their deposit portfolio since the beginning of the fiscal year on July 16 till December 31, show the central bank data. But they extended Rs167.4 billion in credit during the five-and-a-half-month period.

This asset-liability mismanagement has exerted pressure on credit to core-capital-cum-deposit (CCD) ratio of banks and financial institutions. The central bank has fixed CCD ratio of 80 percent for banking institutions.  

This means banking institutions cannot lend more than 80 percent of their total local currency deposit and core capital combined.

Although none of the bank has breached the lending limit so far, CCD ratio of more than half of the commercial banks exceeded 77 percent as of December 29, show the latest data of the Nepal Bankers’ Association, the umbrella body of commercial banks.

Of these banks, CCD ratio of six has crossed 79-percent mark and another six

have seen the ratio exceed 78 percent. The situation is expected to get worse in mid-January when around Rs60 billion in first instalment of income tax is expected to get transferred from various bank accounts to the state’s coffers.