banking system – Future Komp Mon, 14 Mar 2022 09:40:00 +0000 en-US hourly 1 banking system – Future Komp 32 32 BSP sets 4% credit allocation for innovation development – Manila Bulletin Mon, 14 Mar 2022 09:40:00 +0000

The Bangko Sentral ng Pilipinas (BSP) has published proposed rules to guide banks in allocating at least four percent of their loanable funds to the development of innovation for the benefit of micro, small and medium-sized enterprises (MSMEs) and startups.

The BSP in the draft circular stated that the loanable funds for the innovation development credit will be calculated in the same way as the calculation of the loanable funds for agriculture and the land reform credit.

The guidelines for mandatory crediting followed the provisions of Section 23 of Republic Act No. 11293 or the Philippine Innovation Act which was enacted in 2019 and its rules and regulations. ‘application.

The BSP said qualified borrowers for the Innovation Development Credit are MSMEs, startups, innovation centers and business incubators, as well as other entities that support the development of new technologies and innovative goods or services.


“Banks must set aside at least four percent (4%) of their total loanable funds for innovation development credit,” the central bank said.

However, newly established banks will be exempted from the mandatory innovation development credit for a period of three years from the date of commencement of operations, the BSP said. These are banks that commenced operations after August 6, 2019. The circular will also not include banks formed through the acquisition/purchase of voting shares of an existing national bank or the merger or consolidation of banks.

The credit quota will be reviewed jointly by the National Innovation Council and BSP every three years.

“The Bangko Sentral recognizes that innovation plays an important role in driving inclusive development and promoting the growth and national competitiveness of micro, small and medium enterprises,” BSP said in the draft. circular, currently circulated among the banks. “Innovation encourages creative thinking, which in turn increases productivity and economic output. The banking system

plays a crucial role in providing credit needed to support the development of new technologies and other innovation-related activities,” the BSP said.

All banks are required to submit a quarterly report to monitor their compliance. The BSP will impose a penalty of half percent or 0.5 percent of the amount of non-compliance or sub-compliance.

About 90% of the penalties that BSP will collect will go to its “innovation fund”, while the remaining 10% is intended for administrative expenses. The fund, which will be administered by the National Innovation Council, will be set up to strengthen entrepreneurship and companies engaged in developing innovative solutions, the BSP said.

The proposed circular has a feedback deadline of March 25, by which time bank suggestions and comments should be submitted to the BSP.

The BSP defines innovation as “the creation of new ideas that results in the development of new or improved products, processes, or services that are then released or transferred to markets.” The Innovation Development Credit includes loans and other financing activities for the development of new technologies, product innovation, process innovation, organizational innovation and marketing innovation.

The draft circular noted that direct compliance means loans granted to qualified borrowers after the enactment of the law.

The BSP will also enable alternative compliance to compulsory credit for the development of innovation, such as: loans or investments in digital/technology platforms for MSMEs for e-commerce; and loans or investments in supply chain finance companies serving the MSME sector.

Other means for banks to comply include: investments in bonds issued by the Development Bank of the Philippines and the Land Bank of the Philippines, the proceeds of which will be used exclusively for on-lending for innovation development; and investment in other debt securities issued by banks and other blue-chip financial and non-financial corporations, the proceeds of which will be used for the development of new technologies, product innovation, process innovation, organizational innovation and marketing innovation.

BSP stated that investment in green/social/sustainable bonds will also be permitted as a compliance alternative if the product is used in one of the following priority innovation areas: food security and sustainable agriculture and natural resources; blue economy; education and academia, including STEM education; health; safe, clean, renewable and reliable energy; climate change and disaster resilience; Infrastructure; human capital development; Digital Economy; and transportation services; and investing in startup stocks.

Banks have an existing compulsory credit allocation of eight percent of their loanable funds for micro and small enterprises and two percent for medium enterprises under RD No. 6977 for the development of the small and medium sector businesses.

At the end of 2021, based on BSP data, banks’ compliance with RA No. 6977 is only 2.08% for micro and small enterprises. This translates into loans of 178.14 billion pesos for micro and small enterprises when banks should have loaned 685.60 billion pesos.

However, banks had a compliance rate of 3.33% for medium-sized enterprises, more than the required 2%, releasing 284.99 billion pesos last year against a required minimum of 171.42 billion pesos.



MSME loan slips fall to 463.13 billion pesos in 2021 Wed, 09 Mar 2022 16:00:00 +0000

MANILA, Philippines — Lending by banks in the Philippines to micro, small, and medium-sized enterprises (MSMEs) fell 3.6 percent to 463.13 billion pesos in 2021 from 480.5 billion pesos in 2020, as the sector has yet to fully recover from the impact of the pandemic, according to the Bangko Sentral ng Pilipinas (BSP).

The industry’s total loan portfolio stood at 8,570 billion pesos in 2021, which means that allocations to the MSME sector should have reached 857.1 billion pesos.

In 2020, industry loanable funds amounted to P8.41 trillion.

BSP data showed that the total allocation of credit from the banking system to micro and small enterprises reached 178.14 billion pula, still below the 685.68 billion pula or 8%, as it only accounted for compliance of 2.08%.

The overall banking system compliance rate of 5.41% last year remained below the 10% required by Republic Act 6977, as amended by RA 8289 and RA 9501, otherwise known as Magna Carta for SMEs.

Funds allocated to medium-sized enterprises amounted to 284.99 billion pesos or more than the 171.42 billion pesos required. This translated into a compliance rate of 3.33%, exceeding the required 2%.

Eric Luchangco, head of corporate banking at Ayala-led Bank of the Philippine Islands, said in a virtual forum on the new BPI digital platform BizKo that the listed bank’s MSME portfolio continues to perform well despite the health crisis. .

Luchangco said MSMEs were hit harder by the pandemic than large customers.

“We are looking to continue to grow our business. We believe that with many areas moving to Alert Level 1, we expect activity to continue to grow this year. And so we are optimistic about our outlook for this year,” Luchangco said.

MSMEs contribute 35.7% of the total value added of the Philippine economy, represent 99.5% of the total number of establishments and employ 62.8% of the total workforce.

However, MSMEs are unable to reach their full potential due to difficulty in accessing credit and finance, especially now that banks are risk averse due to the uncertainties caused by the pandemic.

BPI has launched the simple, affordable and convenient subscription-based digital banking platform to help MSMEs manage their business finances and provide an integrated online system for invoicing and collections.

The all-in-one online platform available via app and web gives MSMEs immediate access to their account information – to view balances, deposits and debts, regularly pay employees, suppliers, utilities and government dues, create digital invoices under their business name, receive invoice number reminders to avoid duplicates, and receive and monitor payments with its intuitive invoicing system.

Luchangco said the pandemic has made running a business even more difficult for Filipino MSMEs.

“In addition to declining profitability, contractors are dealing with increased complexity as issues such as illnesses and blockages have limited their mobility, made operations more expensive and caused significant delays that have inflated their overhead,” Luchangco said.

Ana Sison, Head of Transaction Services Division at BPI, said that BizKo aims to provide individuals and businesses with an efficient, inclusive, safe and secure digital payments ecosystem to reinforce BPI’s commitment to be the partner choice of MSMEs.

Sanctions put Russia in an economic stranglehold and the West has even more options, experts say Tue, 01 Mar 2022 00:15:35 +0000

“It’s a bit like a massive aerial bombardment (in financial terms)”

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The Russian currency plunged and its stock market seized up on Monday after Canada and other G7 countries stepped up financial sanctions aimed at pressuring Moscow to back down from its invasion of Ukraine.


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The measures targeting Russia’s central bank have frozen a significant portion of the country’s $650 billion in reserves, preventing the government from using those emergency funds to prop up its economy against Western onslaught, analysts said.

On Monday, Deputy Prime Minister Chrystia Freeland said that all Canadian financial institutions were barred from engaging in any dealings with the Russian Central Bank, and that Canada was also imposing an asset freeze and a trading ban. with Russian sovereign wealth funds.

Additionally, Prime Minister Justin Trudeau said Canada would ban imports of crude oil from Russia. Canada imported energy products from Russia worth about $290 million from Russia in 2021, according to Statistics Canada, with Quebec and Newfoundland and Labrador accounting for nearly all.

While not a large amount compared to other countries, the bans and bans come on top of international sanctions triggered in recent days, including a statement over the weekend that some Russian banks would cut SWIFT , global interbank messaging. platform that facilitates most international transactions.

And observers say the West still has more economic firepower to deploy if needed.

“It’s a bit like a massive aerial bombardment (in financial terms),” said Mark Warner, an international competition, trade and investment lawyer at MAAW Law.


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The risk that Russia could be further isolated from the global economy accelerated Monday’s run on the country’s currency.

The rouble, which has been under pressure since before Russia followed through on its threat to invade Ukraine last week, fell to its lowest level on record. It sank more than 30% after the leaders of Canada, the European Commission, France, Germany, Italy, the United Kingdom and the United States issued a joint statement condemning the Putin’s “war of choice” and pledging to ensure the withdrawal of “certain Russian banks” from the SWIFT system.

“Those holding ruble deposits in Russia, including businesses, sensing that the Russian banking system might be cut off from the rest of the world, rushed to try to convert them into dollars or other Western currencies held there. ‘stranger,” said Avery Shenfeld, chief economist. at CIBC Capital Markets.

“All this selling, without the need for an offsetting purchase, creates a huge imbalance that drives the ruble down.”

Clifford Sosnow, a partner at Fasken Martineau DuMoulin LLP law firm in Toronto, said the combined sanctions would make it “extremely” difficult to move dollars to and from the Russian market and cause “widespread disruptions to supply chains involving the Russia”.

He added that the latest sanctions are in addition to existing sanctions related to Russian investments in certain oil production operations.

“Withdrawing Canadian and other countries’ banks from SWIFT access to Russian banks and preventing the Central Bank of Russia from accessing foreign exchange reserves…makes any international trade with Russia difficult, including oil purchases and gas from Russia,” said Sosnow, who is president of the international trading group at Faskens.


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However, some observers have noted that there is still some firepower left in the financial arsenal, even though its use could hurt some G7 countries that are still heavily dependent on Russian oil and gas exports.

An example of restraint can be seen in the decision not to cut all Russian banks from the global SWIFT interbank network, which will allow some payments to continue.

“While public opinion may demand more, for now the SWIFT-related sanctions are likely steep but not overly negative,” Citi analysts led by Dirk Willer said in a note to clients on Monday.

Europe, and in particular Germany’s heavy reliance on Russian natural gas, is pushing G7 countries, including Canada, to exert as much pressure as possible on banks, oligarchs and ordinary citizens without taking measures so widespread and comprehensive as to compromise these energy resources. imports, Warner said.

“It’s obviously a very fluid situation, but that’s the architecture…to keep these countries out,” he said. “If that changes, we’ll know right away because…it would actually be (the financial equivalent of a) nuclear attack.”



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Agri-Agra Act Changes to Free Up More Funds Sat, 12 Feb 2022 16:00:00 +0000
Lawrence Agcaoili – The Filipino Star

February 13, 2022 | 00:00

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) says farmers, fishers and micro, small and medium enterprises (MSMEs) in the agriculture, agribusiness and related sectors should be given a bullet in arm once amendments to the prescribed thresholds for agriculture and land reform loans are enacted.

BSP Governor Benjamin Diokno made the statement after the Senate approved Senate Bill 2494 or amendments to Republic Act 10000 or the Agri-Agra Credit Reform Act of 2009 on 2 February.

The House of Representatives approved his version via Bill 6134 at third and final reading in March 2020.

The next step in the legislative process is the bicameral procedure.

“The Agri-Agra Bill will strengthen rural development through a holistic approach to meeting the financing needs of the agricultural finance ecosystem,” Diokno said.

A priority legislative measure of BSP, the proposed amendments to the Agri-Agra Bill aim to improve the creditworthiness of agricultural workers and their enterprises by building their capacities, modernizing their business operations and integrating them into national and oriented value chains. profitable export. .

Under the current law, banks are required to set aside 15% of total loanable funds for agriculture and an additional 10% should be made available to land reform beneficiaries, as required by presidential decree. 717.

At the end of September last year, loans disbursed by the banking sector for agriculture and land reform jumped 21.4% to 804.16 billion pesos from 662.62 billion. pesos over the same period in 2020, but the sector continued to fall short of the prescribed threshold. for the sector.

BSP data showed that the banking system was only able to allocate around 10.73% of its total loanable funds during the nine-month period, well below the 25% threshold.

Total loanable funds generated by Philippine banks increased by 15% to P7.49 trillion at the end of September last year from P6.51 trillion at the end of September in 2020.

According to the BSP, loans granted by banks to the agricultural sector jumped by 21.2% to reach 735.24 billion pesos against 606.79 billion pesos for a compliance rate of 9.81% or less than 15%. required.

On the other hand, loans for agrarian reform granted by banks also jumped by 23.4% to 68.93 billion pesos against 55.84 billion pesos. However, the amount was still below the prescribed 10% with a compliance rate of only 0.77%.

The BSP said earlier that banks have been paying about 2 billion pesos on average in penalties per year since 2011 due to their failure to comply with the Agri-Agra law. In fact, the industry paid 13.4 billion pesos between 2011 and 2018 to settle the fines.

Banks decide to raise interest rate on deposits by one percent due to tight liquidity – myRepublica Sat, 12 Feb 2022 12:41:09 +0000

KATHMANDU, February 12: Banks are raising the interest rate on deposits citing the tight liquidity position in the country’s banking system.

The Nepal Bankers Association (NBA) at a meeting on Friday decided to raise the interest rate on deposits by one percent. In the revised rate, the apex organization maintained the 11.03% cap on fixed deposits for individual customers.

The upper limit of the interest rate for institutional depositors has been set at 10.03% per annum. Similarly, the interest rate on savings accounts has been set at 5% lower than the interest rate on time deposits while the interest rate on demand deposits is maintained at 3.015% by year.

According to a banker, the banks are seeking to raise the interest rate following pressure from the Nepal Rastra Bank (NRB) to do so. Amid a growing shortage of loanable funds despite the implementation of various measures by the NRB, the central bank reportedly asked banks to raise interest rates to attract more deposits.

According to NRB records, the base interest rate on loans reached 8.42% in mid-January. Similarly, the average interest rate on deposits reached 6.37% per year.

Following a rise in interest rates on deposits, banks are expected to raise the lending rate soon. Recently, banks raised their base interest rate on loans by more than two percentage points starting in mid-January, citing increased spending on deposit interest.

Decision to raise internal loans could worsen liquidity crunch Sun, 30 Jan 2022 01:31:21 +0000

As the government struggles to spend its existing resources, it has started to raise internal loans, fueling fears that this will lead to a further shortage of financial resources at banks which are already under pressure to lend due to the lack of of cash.

On Friday, the Nepal Rastra Bank solicited applications from banks and financial institutions and ordinary citizens to subscribe to the Development Bonds worth Rs 10 billion for the second time in less than a week in a bid to raise loans on the domestic market for the government.

The central bank has set an auction date of Jan. 30 for the four-year development bonds.

On Wednesday, the central bank sold 10 billion rupees of development bonds-2024, a debt instrument with a two-year maturity to banks and financial institutions.

According to the central bank, banks and financial institutions had applied for development bonds worth 52 billion rupees.

Even though the government continued to underperform on the expenditure part, the government continued to increase internal lending, which led to hoarding resources with the government.

“The decision to raise internal loans now was made because raising all loans in the last quarter of the fiscal year could disrupt the market,” said Mukti Pandey, head of the public debt management office. “Given weak government spending so far and tight liquidity in the banking sector, we are not increasing lending much in the third quarter.”

The government, through the Replacement Bill, had in September revised its internal lending to 239 billion rupees for the current financial year from the earlier plan to raise 250 billion rupees.

Government spending as of January 27 stands at around 33% while capital spending is around 15%, according to the Office of the Comptroller General of Finance, which maintains records of government revenue and expenditure.

As the government collected the first installment of income tax in mid-January, the public treasury was flooded with money.

Although the Treasury’s cash reserves remained idle, the government failed to channel them into the banking sector. As a result, the private sector finds it difficult to receive loans from banks and financial institutions.

Bankers said they were barely making any new loans.

“We have been very selective in lending as our credit to deposit ratio has been around 90 percent,” said Anil Kumar Upadhyay, managing director of the Agricultural Development Bank. “They are intended for long-term ongoing projects and new projects such as hydroelectric projects.”

However, demand from banks and financial institutions for government bonds – five times larger – on Wednesday raised questions about the reality of the liquidity crisis in the banking system. The demand from banks and financial institutions stood at around 52 billion rupees, while the government said it was issuing bonds worth 10 billion rupees.

“I’m not sure about the liquidity situation in the banking sector after the oversubscription of development bonds,” Pandey said.

The bankers specified that they demanded the government bonds only to manage their liquidities, which they must obligatorily preserve.

“We need to maintain liquidity outside the 90% credit-to-deposit ratio, with 10% coming from deposits and paid-up capital,” Upadhyay said. “Some of the government securities have matured and are maturing and buying new government securities will help adjust the spread once the existing securities mature.”

But bankers also argued that banks could also buy government securities at less than 90% of the credit-to-deposit ratio.

“If liquid funds are available and there is a good rate, banks can also buy government securities at less than 90% of deposits that can usually be lent,” said Nischal Raj Pandey, managing director of Sanima Bank.

He said, however, that this would not seriously affect banks’ ability to lend under normal circumstances, as they can receive a standing liquidity facility from the central bank by depositing the government securities.

Bankers, however, have argued that banks are unlikely to buy development bonds from the portion of deposits that should be used to make loans.

Due to excessive lending in the first quarter of the current fiscal year without paying much attention to collecting deposits, the banking system currently does not have adequate resources to make new loans. Some banks have completely halted new lending while others have been selective in granting loans.

Upadhyay, who is also the chairman of the Nepal Bankers Association, said banks are no longer offering large-scale loans since the banking sector is facing shortages of loanable funds.

The central bank said half of lending in the first quarter was for import financing, which contributed to a massive balance of payments deficit and the depletion of foreign exchange reserves.

Today, the private sector does not even get loans to invest in the productive sector. Due to weak public spending, the flow of financial resources from the public treasury to the banking sector does not occur on a large scale, which contributes to the continued shortage of liquidity in the banking sector.

Citing shortages of loanable funds from the banking sector, the government has delayed lifting internal loans this year.

In the last fiscal year 2020-21, the government had started raising internal loans in early October.

But bankers have said the government should step up spending to deal with shortages of loanable funds.

Finance Minister Janardan Sharma told a meeting of the finance committee formed under the Intergovernmental Provincial Council on Friday that the government would encourage increased spending.

“The government will provide more budget to offices that can spend more,” he said, according to a press release issued by the minister’s personal secretariat.

BSP makes last push for reform measures Fri, 21 Jan 2022 21:26:00 +0000

With only a few months left in the 18th Congress, the Bangko Sentral ng Pilipinas (BSP) on Friday reiterated its push for pending bills conducive to economic recovery amid the protracted pandemic.

Specifically, the BSP was pushing for the adoption of the following measures: the Law on the Protection of Consumers of Financial Products and Services, the Bill on the Secrecy of Bank Deposits, the Bill on the Regulation of Bank Accounts and electronic wallets, as well as amendments to the Agri-Agra Act and the Philippine Deposits Act. Charter of Insurance Corp. (PDIC), Governor Benjamin Diokno said in a statement.

“The BSP’s legislative program aims to strengthen the banking system, foster financial inclusion, improve the provision and address social issues related to access to financial products and services, and support economic growth,” he said. said Diokno.

Diokno told senators this week that the financial consumer protection bill, once passed, will combat the proliferation of frauds and scams, both offline and online.

“The enactment of the Financial Consumer Protection Act aims to provide protective armor to all financial consumers. This will ensure that relevant government institutions and financial regulators are fully empowered with the legal authority to enforce prudent, accountable and customer-centric standards of business conduct,” Diokno said.

Regarding the bank deposit secrecy bill, Diokno said it would equip the BSP with tools to prove fraud, irregularities and other illegal activities among the institutions it oversees, including the investigation of closed banks. “The bill will also enable the BSP to comprehensively review a banking institution to consider all areas of risk when assessing financial condition, risk management and corporate governance. from a bank,” he said.

The Electronic Bank Account and Wallet Regulation Bill, meanwhile, would “protect people from falling prey to various cybercrime schemes,” Diokno said, as it would regulate and prohibit the use of financial accounts for criminal activities. “This will strengthen consumer protection and inspire confidence in the financial system,” he added.

Amendments to Republic Act (RA) No. 10000 or the Agri-Agra Act of 2009 were also needed “to enhance rural development and improve the welfare of beneficiaries in farming and rural communities by adopting a holistic approach that takes into account the broader ecosystem of agricultural finance”. and the development requirements of rural communities,” said the head of BSP.

RA 10000 mandated banks to reserve a portion of their total loanable funds for the agricultural sector and land reform beneficiaries. However, compliance had been weak, so the BSP was pushing for other means of compliance, including “green” and sustainable loans or financing, by changing the law.

Amending the PDIC’s charter was also a priority for the BSP so that it could directly oversee the public company.

Diokno also supported pending changes to foreign investment and civil service laws to further liberalize the economy and attract more foreign capital, which President Duterte’s economic officials were pushing for instead of removing restrictions enshrined in the US Constitution. 1987.

“We must not let the COVID-19 pandemic derail our long-term goals. With or without crisis, we should continue to pursue structural reforms that would put the Philippines not just on a pre-crisis growth path, but on a sustainable development path,” according to Diokno.

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“Magna Carta” for MSMEs producing a “parvi eventus” Wed, 05 Jan 2022 14:41:38 +0000

As reported by the Bangko Sentral ng Pilipinas (BSP) this weekend, Philippine banks again failed to meet their obligation to provide loans to micro, small and medium enterprises (MSMEs) at the end of the third quarter of this year. In this regard, the “big charter” of MSMEs has yielded minimal results, and needs to be reassessed.

“The Magna Carta for MSMEs”, originally enacted in 1991 as the Republic Act (RA) 6977, and amended by RA 8929 and RA 9501 in 1997 and 2008, respectively, requires banks to set aside 10 percent of their total loanable funds to provide finance for MSMEs. Despite several rule changes by the BSP over the years to facilitate compliance with the mandatory threshold by banks, it was never reached, and the results reported by the BSP for the period ending September 30, 2021 are particularly disappointing. .

According to the BSP, out of the total of 8.44 billion pesos of loanable funds at the end of the third quarter, banks have set aside only 440.34 billion pesos for loans to MSMEs, or only 5.21 % of total. This was just over half of the 826.64 billion pesos that should have been made available.

As the economy as a whole struggles to recover from the negative effects of the coronavirus pandemic, this half-effort on the part of Philippine banks is worrying and most unwelcome. MSMEs, as is known, make up 99% of all Filipino business establishments, and precisely because they are small businesses, have been hit hardest by the economic downturn induced by the pandemic.

Banks, of course, had their reasons for reluctance, expressed in the BSP’s Q3 2021 senior bank loan officer survey. “The banks interviewed indicated that the reported tightening of global credit standards was mainly due to a deterioration in borrower profiles and the profitability of the banks’ portfolio, a less favorable economic outlook and reduced tolerance for risk, among others. factors ”the BSP explained.

The overall problem seems to boil down to two equally valid but apparently incompatible priorities. The country needs a strong and stable banking system. At the same time, the MSME sector, the backbone of the economy, needs access to credit in order to maintain its own stability and growth, which includes the sector’s significant contribution to employment.

The “Magna Carta for MSMEs” in its various iterations was intended to meet the latter priority, but it clearly failed to do so, and there is no reason to believe that continuing to try within the legal framework existing is never going to give the desired result. The BSP, to its credit, has tried to do what it can to make the system work, but the existence of the law also limits its options.

We suggest that the root of the problem lies in the somewhat lazy approach to actualizing what started out as good intentions to support the MSME sector through an irrationally broad “magna carta” law. This form of legislation has been so overused in this country that it has practically become a cliché and, more often than not, cannot work as intended, even through multiple amendments and extensive development of implementing rules and regulations.

Regarding specifically the issue of credit availability for MSMEs, a more effective approach would be to draft a law that expands the authority of the PASB to establish loan threshold mandates on a more targeted basis for different categories of creditors. banks, even for individual banks. Different banks have different markets, capacities and business priorities; a 10 percent mandate in one area or for a particular bank may be too high or too low, depending on its situation and that of its customers.

This, of course, would require lawmakers to do detailed work and harness genuine expertise on the issue rather than focusing on the performative spectacle of making the broadest possible laws, which is a choice that can be made. to be met with some reluctance. However, passing laws that continually fail is worse than not passing any at all; voters and relevant stakeholders in banking and MSME sectors should demand better.

The central bank authorizes banks to use funds from local units for loans to the productive sector Tue, 04 Jan 2022 08:00:00 +0000

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

According to 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% currently to less than 90%, the mandatory threshold, according to the central bank. The central bank has already told banks to submit an action plan to limit their credit-to-deposit ratio to less than 90% by the end of the current fiscal year.

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

“After the latest directive, up to 49 billion rupees are expected to be injected into the banking system,” said central bank spokesman Gunakar Bhatta. The central bank’s directive came after the government decided to increase the share of reserve funds that commercial banks can consider as deposits. Previously, such a limit was 50% of reserve funds.

At the end of December last year, the central bank had also approved a refinancing program worth 92 billion rupees. These two measures will bring more than 140 billion rupees to the banking system.

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

Due to excessive lending during the first months of the current fiscal year, the banking system had to face a liquidity crisis.

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

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

As the government fails to spend its budget, it will collect 40% of income tax in the first installment in mid-January, in accordance with Section 93 of the Income Tax Act 2002. income. This will drain the resources of the banking system and bloat the state coffers. The government plans to collect around Rs 80 billion in income tax by mid-January.

Citing a potential severe liquidity shortage due to tax collection, the government and the central bank have decided to inject liquidity into the banking system through refinancing programs and local government funds, Prakash Shrestha said, head of the economic research department at the central bank, the Post. week.

Experts have warned that a prolonged liquidity crisis will prevent lending to sectors that could 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 authorize banks to use up to 80% of local government funds in the productive sector. “We have also banned banks from using local government resources to finance imports as part of the import control measures we have taken in recent weeks,” Bhatta said.

Economic recovery: some glimmers of hope but still a long way to go – myRepublica Sat, 01 Jan 2022 00:28:32 +0000

The year 2021 was decidedly not as gloomy as the year before in terms of freeing the economy from the clutches of the COVID-19 pandemic. Economic activities accelerated as the spread of the coronavirus gradually slowed. The signs are positive but the economy could sink into a crisis if corrective measures are not implemented on time.

The Nepalese economy, which was heading towards recovery at the end of 2020, following a decline in the impacts of the first wave of the coronavirus, was faced with the second wave of the pandemic towards the end of April 2021. Activities were paralyzed again for months. This has brought down a number of macroeconomic performance indicators, mainly those related to the external sector, raising the question of whether the current situation is a “pre-cyclonic watch” for the impending economic crisis in the country.

Throughout 2021, the sharp fluctuation in bank interest rates, the worsening of foreign currency reserves with the deterioration of the balance of payments (BoP), the surge in consumer inflation, the tightening of liquidity in the banking system, rising government borrowing, widening trade deficit and volatility in the stock market have all come into the limelight. Experts stressed that the situation calls for the implementation of appropriate public policies. However, there are some indicators that the economy is gradually improving.

After the first foreclosure imposed in March 2020, the economy still has not felt the heat mainly due to the cushion of a growing influx of remittances, the main source of the country’s foreign exchange earnings that largely fund the landlocked economy based on imports. Just after a year of the first wave, remittances began to chart a downward trend, putting pressure on the country’s foreign exchange reserves.

Nepal Rastra Bank (NRB) records show that in January 2021, foreign exchange reserves with the country stood at US $ 12.78 billion, sufficient to cover potential merchandise imports of 13.9 months and imports. of goods and services for 12.6 months. As of mid-November 2021, the country is left with foreign exchange reserves of $ 10.47 billion, which can finance imports of goods and services in just 7.2 months.

According to Nara Bahadur Thapa, former executive director of NRB, Nepal need not worry unless the foreign exchange reserve is enough to support imports for seven months. “However, if it is declining rapidly each month, it should be a matter of concern and calls for effective government policies,” Thapa said.

Keshab Acharya, former economic adviser in the finance ministry, said the problem occurring in the external sector will certainly create a ripple effect on the domestic sector of the economy.

Over the past almost six months, the country’s banking system has suffered from a shortage of loanable funds that bankers have blamed in large part on the central bank’s shift to providing deposit-credit (CD) to credit-to-deposit ratio. capital base plus deposit (CCD), slowing government investment spending and lower remittances. NRB data shows that aggressive lending by banks and financial institutions (CIBs) against slow deposit collection has been the main cause of the current liquidity shortage.

At the end of December, the total deposits with CIBs reached 4.81 trillion rupees while they provided loans of 4.61 trillion rupees. Due to an excessive flow of loans, the CD ratio reached 91.02%, which was well above the ceiling set by the central bank of 90%.

Because of this, many banks have already stopped issuing loans to potential investors, which economists say has created the risk of an economic downturn. Experts said the lack of loan flow will also affect the government’s goal of achieving economic growth of seven percent. Acharya said the inability of banks to provide loans could have a detrimental effect on economic growth, as economic activities slow down when there is not enough liquidity in the market.

Rameshwor Khanal, former finance secretary, however, ruled out the possibility of an economic recession due to the inability of CIBs to provide loans to the private sector. “In the post-pandemic period, the private sector has taken out excessive lending, which is of course a positive indication as it could help increase aggregate demand while boosting supply,” Khanal said.

NRB records show that there has been a significant increase in bank loans to manufacturing and service industries despite a slow increase in outstanding loans to agricultural production. If central bank records are anything to consider, CIB’s loan portfolios, given lending on imports of consumer goods to the limit, will show positive results in the future, experts say.

Over the past year, Nepal’s trade deficit has widened from Rs 600.45 billion to Rs 735.48 billion (in mid-November), despite the country making a notable gain in revenue export. “It will work better if the spending is made for imports of capital goods,” Khanal said.

During the period, slow growth in revenue collection against a backdrop of increasing government spending increased government deficit financing. Government records show that the public debt has exceeded 1.7 trillion rupees, which represents about 40% of the country’s GDP. The World Bank has predicted that Nepal’s public debt-to-GDP ratio could reach 50% by 2024. Although it is an obligation for a country like Nepal to finance the majority of development projects through Public borrowing, an increase in its amount at an alarming rate, seen at present, is likely to take a toll on the economic progress of the country.

NRB data shows that the government has also failed to control price increases in consumer goods. The consumer inflation rate crossed five percent from around 3.56 percent during the review period. High inflation could cause Nepalese consumers to cut spending while affecting private sector investment, which would be disastrous for a recovery.

Finance Secretary Madhu Kumar Marasini said the surge in demand after a drop in the impacts of the coronavirus has led to a sharp increase in imports and negative impacts on the country’s BoP. According to him, the government has already started implementing policy measures to cope with the BoP, foreign exchange reserves and remittances as well as injecting the necessary amounts to increase liquidity in the banking system. “We may have to wait a few more months to see the positive results of the impacts of government policies,” Marasini added.