Central bank allows banks to use local unit funds for productive sector lendingThe latest move is expected to ease the liquidity crunch in the banking system.
Amid an acute shortage of loanable funds in the banking sector, the Nepal Rastra Bank on Monday opened the door for commercial banks to count upto 80 percent of the reserve funds of the local governments deposited in commercial banks as deposit. The central bank has also paved the way for the banks to use such funds for lending in the productive sector.
As per a new directive issued on Monday, the new provision will be applicable only until the end of the current fiscal year. The move is expected to help reduce the credit to deposit ratio of the banking sector from around 92 percent at present to under 90 percent, the mandatory threshold, according to the central bank. The central bank has already told the banks to submit an action plan to limit their credit to deposit ratio within 90 percent by the end of the current fiscal year.
“Such resources can only be used for lending in the productive sector and cannot be used for financing imports and trading activities,” the directive states.
“After the latest directive, as much as Rs49 billion is expected to be pumped into the banking system,” said Gunakar Bhatta, spokesperson at the central bank. The central bank’s directive came after the government earlier decided to increase the portion of reserves funds that the commercial banks can count as deposit. Earlier, such a limit was 50 percent of reserve funds.
In late December last year, the central bank had also approved a refinance scheme worth Rs92 billion. These two measures will bring over Rs140 billion into the banking system.
Krishna Bahadur Adhikari, president of Nepal Bankers’ Association said these two measures would not only ease the liquidity situation but also allow banks to provide loans, albeit on a limited scale, to the productive sector. Currently, most commercial banks have halted further lending citing a shortage of funds.
Because of excessive lending in the early few months of the current fiscal year, the banking system faced a liquidity crunch.
On the other hand, the government’s expenditure remained very low which prevented the government resources from coming to the banking system from its treasury at the central bank.
As of Sunday, the total spending of the government stood at 27.21 percent of the total budget and capital spending stood at 8.53 percent of the capital budget, according to the Financial Comptroller General Office, which keeps records of the government’s income and expenditure.
As the government is failing to spend its budget, it is going to collect 40 percent of income tax in the first instalment in mid-January as per Section 93 of the Income Tax Act-2002. This will drain the resources in the banking system and swell the government coffers. The government expects to collect around Rs80 billion in income tax in mid-January.
Citing a potential severe liquidity crunch due to tax collection, the government and the central bank moved to pump liquidity into the banking system through refinance schemes and local governments’ funds, Prakash Shrestha, chief of economic research department at the central bank told the Post last week.
Experts have warned that a prolonged liquidity crunch would deny lending to sectors which have the potential to contribute to economic growth.
The central bank has also taken the balance of payment deficit and depletion of foreign exchange reserves into account while deciding to allow the banks to use upto 80 percent of the local governments’ funds in the productive sector. “We have also barred banks from using the local government resources for financing the imports as part of import control measures that we have been taking in the recent weeks,” said Bhatta.