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Central bank authorizes banks to use local unit funds for loans to the productive sector

By on January 4, 2022 0

Amid a severe shortage of loanable funds in the banking sector, Nepal Rastra Bank on Monday opened the door for commercial banks to account for up to 80 percent of local government reserve funds deposited in commercial banks. as deposits. The central bank has also paved the way for banks to use these funds for loans in the productive sector.

In accordance with a new directive published on Monday, the new provision will only be applicable until the end of the current financial year. The move is expected to help reduce the banking sector’s credit-to-deposit ratio from around 92 percent currently to less than 90 percent, the mandatory threshold, according to the central bank. The central bank has already asked banks to submit an action plan to limit their credit-to-deposit ratio to 90% by the end of the current fiscal year.

“Such resources can only be used for loans in the productive sector and cannot be used to finance imports and commercial activities,” says the directive.

“After the last directive, up to 49 billion rupees are expected to be injected into the banking system,” said Gunakar Bhatta, spokesman for the central bank. The central bank directive came after the government earlier decided to increase the share of reserve funds that commercial banks can count as deposit. Previously, such a limit was 50 percent of reserve funds.

At the end of December last year, the central bank also approved a refinancing plan worth Rs 92 billion. These two measures will bring in more than Rs140 billion in the banking system.

Krishna Bahadur Adhikari, president of the Nepal Bankers Association, said the two measures would not only ease the liquidity situation, but also allow banks to extend loans, albeit on a limited scale, to the sector. productive. Currently, most commercial banks have stopped lending more due to a lack of funds.

Due to excessive lending in the first months of the current fiscal year, the banking system faced a liquidity shortage.

On the other hand, state spending has remained very low, which has prevented state resources from coming to the banking system from its treasury at the central bank.

On Sunday, total government spending stood at 27.21 percent of the total budget and capital spending was 8.53 percent of the capital budget, according to the Office of the Comptroller General of Finance, which maintains records of government revenues and expenditures.

As the government does not spend its budget, it will collect 40 percent of income tax in the first installment in mid-January in accordance with Section 93 of the Income Tax Act 2002. This will drain the resources of the banking system and inflate the state coffers. The government expects to collect around Rs 80 billion in income tax by mid-January.

Citing a serious potential liquidity shortage due to the collection of taxes, the government and the central bank decided to inject liquidity into the banking system through refinancing programs and funds from local governments, the latter said. Prakash Shrestha, head of the economic research department at the central bank. the week.

Experts have warned that a prolonged liquidity crunch would prevent lending to sectors that have the potential to contribute to economic growth.

The central bank also took into account the balance of payments deficit and the depletion of foreign exchange reserves while deciding to allow banks to use up to 80 percent of local government funds in the productive sector. “We have also prohibited banks from using local government resources to finance imports as part of the import control measures we have taken in recent weeks,” Bhatta said.