Government delays increase in domestic lending due to liquidity shortage in banking system

Last year, the government started raising internal borrowing in early October. But this year, as the month draws to a close, the government has yet to decide when domestic debt will be increased.

The government of Sher Bahadur Deuba has reduced internal loans to be raised in the current fiscal year to 239 billion rupees through the 250 billion rupee replacement bill proposed by the previous government led by KP Sharma Oli . The replacement bill was approved by the House of Representatives on September 20 and by the National Assembly on September 24.

“The main reason for the delay is the amendment made to the previous budget, as it created uncertainty in the planning,” Hira Neupane, deputy secretary at the Bureau of Public Debt Management, told the Post. “As far as I know, the schedule for increasing internal lending has already reached the Ministry of Finance. The ministry is expected to make a decision on this within a week. “

Neupane added that the government could start increasing internal lending in mid-November.

But another office official told the Post on condition of anonymity that aside from the change in the budget, the current liquidity crisis in the banking system has also prompted the government to delay the schedule for increasing domestic lending.

According to the official, the open market operations committee headed by the vice-governor of Nepal Rastra Bank has already recommended the schedule for raising internal loans, and the loans would likely be taken out from Mangsir (after mid-November). .

“As per the recommendation, the government will not be increasing a large amount of debt anytime soon, as the banking system faces a shortage of loanable funds,” the official said. “As a first step, the government will issue debt securities to raise small amounts in the form of loans. When the liquidity situation improves with the increase in government spending, the larger amount of debt will be increased.

Treasury bills, development bonds, citizens’ savings bonds, national savings bonds, and foreign employment savings bonds are debt instruments that governments have used to borrow internally.

According to the official, the open market operations committee is preparing first to raise small loans, because raising large amounts during a liquidity crisis requires higher interest rates.

The banking system is in a liquidity crisis due to excessive lending relative to the collection of deposits during the first three months of the current fiscal year.

According to the central bank, banks and financial institutions made loans of around Rs 326 billion in the first quarter of the current fiscal year, against deposit collections of around Rs 100 billion. As a result, the credit-to-deposit ratio of many banks has exceeded regulatory limits of 90%, effectively preventing them from making new loans without increasing their deposits. This has pushed up the interest rates on deposits and loans.

With remittances declining and government spending remaining low, deposits in the banking system have not been able to increase enough to balance excess lending.

According to the central bank, remittances fell 6.3 percent to 155.37 billion rupees. Overall government spending on Thursday stood at 15.46% of the total allocated budget and capital spending remained lower at 3.75% of the allocated amount, according to the Office of the Comptroller General of Finance, which is responsible for the maintenance of government revenue and expenditure records.

Officials admit that it is best to raise internal borrowing and consider the liquidity situation in the banking system and government spending.

“What are we doing by increasing internal lending if the government cannot spend the resources,” said Dev Kumar Dhakal, central bank spokesperson. “I think the timetable for increasing the debt was prepared by looking at both government spending and the cash flow shortage.”

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