BFIs extend over Rs 300bn to central bank
KATHMANDU:
It appears banks and financial institutions (BFIs) have not been able to make productive use of funds so far this fiscal year.
They have, in total, extended over Rs 300 billion — mostly in rolled over funds — literally for free to Nepal Rastra Bank (NRB), the central bank, rather than loan it to the private sector, which, on average, would have generated returns of at least 10 per cent.
NRB has, so far, mopped up Rs 240.50 billion from the banking sector using instruments called reverse repo with seven-day maturity. It has also absorbed another Rs 75 billion through a new instrument called term deposit with three-month maturity.
Average return on reverse repos launched 24 times so far this fiscal stood at 0.037 per cent, while average yield on eight term deposits stood at 0.381 per cent. Considering average inflation of 7.45 per cent this fiscal, it could be said banking institutions extended a total of Rs 315.50 billion for free to the central bank.
Although most of this fund was rolled over — meaning money invested in securities was again used upon maturity of instruments — a significant portion of it could have been put to productive use, like setting up enterprises and building physical infrastructure, which country desperately needs. Instead, they were invested in instruments, which gave virtually zero return.
“It’s becoming evident banking institutions’ dependency on NRB is growing in terms of management of excess funds,” a high-ranking NRB official told The Himalayan Times on condition of anonymity. “They should become more innovative and introduce long-term credit products, instead of generating business solely from short-term consumer or trading loans.”
The central bank generally floats instruments like reverse repo whenever there is excess money in the banking sector. This is to prevent surplus funds from flowing into unproductive sectors, like stock and real estate markets, which tend to drive up asset prices and subsequently build inflationary pressure, causing the value of money to erode.
NRB started using these liquidity-mopping instruments since beginning of this fiscal in mid-July when excess liquidity was said to hover around Rs 100 billion. That amount came down to around Rs 30 billion as of January 11, NRB data show.
One of the reasons for the drop in excess liquidity is launch of instruments like reverse repo and term deposit. Another is slow deposit growth rate, which hovered at around 4.75 per cent in the five-month period between mid-July to mid-December, as against 7.51 per cent in the same period last fiscal.
Deposit growth rate failed to meet the pace of last fiscal due to very low growth of remittance income — money sent by Nepalis working abroad.
Despite this, banks still have excess liquidity of around Rs 30 billion, of which over Rs 27 billion is being held by 27 private-sector led banks. As of January 11, one private sector bank was holding surplus fund of Rs 3.90 billion, while Nepal Investment Bank, Everest Bank, NIC Asia Bank and Nepal SBI were holding excess liquidity of over Rs two billion, NRB data show.
Such a big pile of idle funds tends to hit profitability of banks, as they earn majority of the income by selling money in the form of loans.
“Banks have not been able to make use of excess funds because of low credit demand. This is because of low investor confidence. This situation would only correct if there is policy predictability, for which promulgation of constitution is necessary,” NIC Asia Bank CEO Sashin Joshi said.
“But in the short term, problems created by excess liquidity could be alleviated if the government cranks up capital expenditure.”
In developing countries like Nepal, with huge infrastructure gap, public spending does crowd in private investment. Government knows this well, yet it usually fails to make timely use of capital budget. This fiscal, the government allocated Rs 116.75 billion for capital expenditure. But after six months into this fiscal, the government has only used Rs 13.99 billion, or 12 per cent of the total allocation.
While capital expenditure seems to be in the tank and government revenue generated from various taxes is increasing, treasury surplus — idle government money parked at NRB — stood at Rs 84.42 billion as of January 9. The level of treasury surplus is expected to go up further when firms pay their first income tax installment of 40 per cent of the committed amount by Wednesday.
It is an irony that the government is sitting on top of all these funds, while construction of second international airport in Nijgad, east-west railway, hydro projects and numerous other roads and bridges — which could generate tens of thousands of jobs — have not begun yet.
Source: THT
