Bank withdrawals to pay income tax squeezing liquidity

Published On: January 12, 2019 02:05 AM NPT By: Republica  | @RepublicaNepal

Withdrawals expected to Rs 71 billion by mid-January

KATHMANDU, Jan 12: With the income tax filing deadline of Paush-end [January 14] approaching, registered enterprises are withdrawing money from their bank accounts to pay the taxes, putting further pressure on the liquidity of banks. Bankers said this will cause the 'credit crunch' to worsen further in the coming months.

According to an estimate by the Inland Revenue Department, the government will collect Rs 71 billion in income tax by January 14. According to the Income Tax Act, taxpayers are required to pay 40 percent of their estimated tax liability for the current fiscal year by Paush-end. Since most taxpayers will use their bank balance to pay the taxes, there will be pressure on the liquidity of bank and financial institutions (BFIs).

The collected tax will remain in the government treasury and will not go into the banking channel until the government boosts its expenditure.

Banking executives are already fretting over the huge withdrawal of deposits.

Commercial banks, which used to raise interest rates to attract deposits to make up for the withdrawal, do not have the option of raising interest rates anymore as the Nepal Bankers' Association (NBA) has decided to cap the deposit interest rates for its member banks. NBA a few weeks ago decided to limit the interest rate on individual deposits at 9.5 percent per annum.

The acute shortage of lendable fund in the banking sector is likely to compel many banks to stop lending altogether as the ongoing deposit withdrawal will raise their credit to core capital plus deposit (CCD) ratio, which is already near the upper limit.

According to the NBA, the average CCD ratio of 28 commercial banks stands at around 77 percent till the last week compared to 80 percent of the upper limit set by the NRB.

If the CCD ratio of Rastriya Banijya Bank and Nepal Bank Ltd — two government-owned banks are ignored, the average CCD ratio reaches around 78.5 percent.

The higher the CCD ratio, the lower the loanable funds BFIs will have at their disposal.

“Funds withdrawal is going to further increase this year. But, we cannot increase the interest rate on deposits due to the NBA decision. And this means banks will have to stop lending until deposits grow,” said a bank CEO.

Some bankers, however, opine that the NRB should provide banks more money under its refinancing window as part of addressing the shortage of lendable funds.

“The refinancing fund can be increased to make sure that priority sectors are not deprived of credits until the government increases its spending that pumps more cash into the banking system,” said Bhuvan Dahal, the CEO of Sanima Bank Ltd.“Another way to get rid of the problem is that the government could transfer the budget allocations meant for local units through government-owned banks. Later, the banks whose CCD ratio have breached the regulatory limit can sell their loans to the government-owned banks,” he added.

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