Govt puts its plan to transfer funds to banks on holdThere is bad news for banks and financial institutions waiting for the government to shore up their weak loan disbursement capacity, as a committee formed to recommend ways to channel surplus funds from state coffers to the banking system has identified the need to make certain legal changes before making the transfers.
There is bad news for banks and financial institutions waiting for the government to shore up their weak loan disbursement capacity, as a committee formed to recommend ways to channel surplus funds from state coffers to the banking system has identified the need to make certain legal changes before making the transfers.
This is an indication that the government will not immediately transfer funds from its coffers to banks and financial institutions that are facing shortage of money that could be disbursed as loans.
The Ministry of Finance had recently formed a taskforce under Ram Sharan Pudashaini, head of the Economic Policy Analysis Division at the ministry, to look into ways to channel government’s surplus funds to banks and financial institutions. The taskforce submitted its report on Wednesday [although it was given a deadline of Sunday to hand over its recommendations], according to Finance Secretary Shankar Prasad Adhikari.
“The report has basically said the concept of transferring government’s surplus funds to the banking system is principally okay,” said Adhikari. “But it has identified the need to amend the Appropriation Act and finalise certain modalities to transfer the funds.”
The taskforce has, thus, sought more time to conduct the study, added Adhikari.
Banks and financial institutions are currently facing severe crunch of loanable funds because of mismatch in deposit collection and credit disbursement. 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. The situation is expected to get worse in a few days when around Rs60 billion in first instalment of income tax is expected to get transferred from various bank accounts to the state coffers. To prop up credit disbursement capacity of banks and financial institutions, the Finance Ministry had recently said Rs70 billion to Rs80 billion from its surplus funds could be channelled to the banking system. Amidst this, the average weighted interbank lending rate of commercial banks fell below 3 percent, indicating improvement in liquidity situation in the banking system.
This prompted the central bank to introduce a money market instrument called term deposit to mop up Rs2 billion from the market. This instrument, floated on Monday, drew bids worth Rs3.9 billion. Surprisingly, the money was absorbed at a time when banks and financial institutions were waiting for the government to inject funds in the banking system. This is also one of the reasons why the government has not shown much interest to immediately transfer surplus funds to the banking system.
But bankers say money market instruments help in management of 20 percent of the funds allocated to meet the regulatory liquidity ratio and not in management of the remaining 80 percent of funds that could be provided as loans.
“The excess liquidity that was mopped up on Monday came from the 20-percent portion of funds, which cannot be disbursed as loans. This does not mean we are not facing any difficulty in management of the remaining 80 percent of funds which can be used for credit disbursement,” bankers said.
Yet there are others who say banks are currently facing problems because of their lack of foresight and the government should not come to their aid as it would set a bad precedent and encourage banking institutions that dig themselves into a hole to seek relief packages in the future as well.