Move to raise internal loans may aggravate liquidity crunchGovernment has sought to raise internal debts by Rs20 billion in less than a week.
As the government is struggling to spend its existing resources, it has started to raise internal loans, stoking fears that it could lead to a further crunch of financial resources in the banks which are already under strain to lend due to shortages of cash.
On Friday, Nepal Rastra Bank sought applications from the banks and financial institutions and ordinary citizens to subscribe to the development bonds worth Rs10 billion, second time in less than a week, in a bid to raise loans from the domestic market for the government.
The central bank has set an auction date for January 30 for the development bonds with a maturity period of four years.
On Wednesday, the central bank had sold Rs10 billion worth Development Bonds-2024, a debt instrument, with a two-year maturity period to the banks and financial institutions.
According to the central bank, the banks and financial institutions had made demands for development bonds worth Rs52 billion.
Even though the government has continued to underperform on the spending part, the government went ahead to raise internal loans, which lead to piling up of resources with the government.
“The decision to raise internal loans now was taken because raising all the loans in the last quarter of the fiscal year may disturb the market,” said Mukti Pandey, chief of the public debt management office. “Considering the government’s poor spending so far and liquidity crunch in the banking sector, we are not raising much loans in the third quarter.”
The government through the replacement bill had in September revised its internal loans to Rs239 billion for the current fiscal year from the earlier plan to raise Rs250 billion.
The government’s spending as of January 27 stands at around 33 percent while capital spending is around 15 percent, according to the Financial Comptroller General Office, which keeps records of the government’s income and expenditure.
As the government collected the first instalment of income tax in mid-January, the government treasury has been flooded with the cash.
Despite cash reserves in the government treasury remaining unused, the government failed to channelise it to the banking sector. As a result, the private sector is struggling to receive loans from the banks and financial institutions.
Bankers said that they are hardly making fresh lending.
“We have been very much selective in the lending because our credit to deposit ratio has been around 90 percent,” said Anil Kumar Upadhyay, chief executive officer of Agriculture Development Bank. “They are for long-term ongoing projects and new ones such as hydropower projects.”
However, the demand from the banks and financial institutions for government bonds—five times the size—on Wednesday has raised questions if the liquidity crunch in the banking system is real. The demand from the banks and financial institutions stood at around Rs52 billion, while the government said it was issuing bonds worth Rs10 billion.
“I am not sure about the liquidity situation in the banking sector after oversubscription of the development bonds,” said Pandey.
Bankers clarified that they have been demanding the government bonds just to manage their liquid funds, which they have to compulsorily maintain.
“We have to maintain liquid funds outside the credit to deposit ratio of 90 percent including 10 percent from deposits and the paid up capital,” said Upadhyay. “Some of the government securities have matured and are maturing and buying the new government securities will help to adjust the gap once existing securities are matured.”
But bankers also maintained that banks could also buy the government securities from within 90 percent of credit to deposit ratio.
“If the liquid fund is available and there is a good rate, banks can also buy government securities from within 90 percent of deposit which usually can be lent,” said Nischal Raj Pandey, chief executive officer of Sanima Bank.
He, however, said that it would not severely affect the banks’ ability to lend in normal circumstances because they can receive a standing liquidity facility from the central bank by depositing the government securities.
Bankers, however, have maintained that there is little likelihood of banks purchasing development bonds from the portion of deposits, which should be used for providing loans.
Due to excessive lending in the first quarter of the current fiscal year without paying much attention to the deposit collection, the banking system is currently without adequate resources to make fresh lendings. Some of the banks have completely halted new lendings while others have been selective in releasing loans.
Upadhyay, who is also president of Nepal Bankers’ Association, said that banks are not offering large-scale loans ever since the banking sector faced shortages of loanable funds.
The central bank said half of the lendings during the first quarter went for import financing which has contributed to a massive balance of payment deficit and depletion of foreign exchange reserves.
Now, the private sector is not getting loans even to invest in the productive sector. Due to the poor government spending, the flow of financial resources from the government’s treasury to the banking sector is not happening on a large scale contributing to continued liquidity crunch in the banking sector.
Citing shortages of loanable funds with the banking sector, the government delayed raising internal loans this year.
In the last fiscal year 2020-21, the government had started raising internal loans in early October.
But bankers said that the government should accelerate its spending to address the shortages of loanable funds.
Finance Minister Janardan Sharma said at a meeting of the finance committee formed under the Inter-Government Provincial Council on Friday that the government would encourage increased spending.
“The government will provide more budget to offices which can spend more,” he said, according to a press statement issued by the minister’s personal secretariat.