The central bank authorizes banks to use funds from local units for loans to the productive sector

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.

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