Government delays lifting internal loans amid liquidity shortage in banking system

In the previous fiscal year, the government had started raising internal loans 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 Sher Bahadur Deuba government has reduced internal loans to be raised in the current fiscal year to Rs 239 billion through the Rs 250 billion replacement bill proposed by the previous KP Sharma Oli-led government. 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 to the previous budget, as it created uncertainty in the planning,” Hira Neupane, undersecretary at the Office of Public Debt Management, told The Post. “As far as I know, the internal borrowing schedule 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 bureau official told the Post on condition of anonymity that in addition to the budget amendment, the current liquidity crisis in the banking system has also prompted the government to delay the timetable for increasing internal lending. .

According to the official, the Open Market Operation Committee headed by the Deputy Governor of Nepal Rastra Bank has already recommended the timing for lifting internal loans, and loans would likely be lifted from Mangsir (after mid-November).

“As per the recommendation, the government will not increase a large amount of debt anytime soon, as the banking system is facing a shortage of loanable funds,” the official said. “Initially, the government will issue debt securities to raise small amounts in the form of loans. When the liquidity situation improves along with the increase in government spending, the greater number of debts will be increased.

Treasury Bills, Development Bonds, Citizens’ Savings Bonds, National Savings Bonds and Foreign Employment Savings Bonds are debt instruments that governments use to raise funds. internal loans.

According to the official, the Open Market Operation Committee is initially preparing to raise loans of small amounts, because raising large amounts in times of liquidity crisis requires higher interest rates.

The banking system is in a liquidity crisis due to an excess of loans in relation to the collection of deposits during the first three months of the current financial year.

According to the central bank, banks and financial institutions extended loans of about 326 billion rupees in the first quarter of the current financial year, against deposit collections of about 100 billion rupees. As a result, the credit-to-deposit ratio of many banks exceeded regulatory limits of 90%, effectively preventing them from lending more without increasing their deposits. This pushed up deposit and loan interest rates.

With declining remittances and government spending remaining low, deposits in the banking system could not increase enough to balance the excessive lending.

According to the central bank, remittances fell by 6.3% to 155.37 billion rupees. Overall government spending as of Thursday was 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 maintaining government revenue and expenditure records.

Officials admit that it is better to raise internal borrowing and take into account the liquidity situation of the banking system and government spending.

“What do we do by increasing internal lending if the government cannot spend the resources,” said central bank spokesman Dev Kumar Dhakal. “I think the debt increase schedule was prepared by looking at both government spending and the liquidity crisis.”

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