The government, while launching the much-delayed fiscal policy for this fiscal year in April, had stated that it would borrow Rs 38 billion from the domestic market to partially finance budget deficit of Rs 63.83 billion. [break]
This meant government bonds worth Rs 38 billion were supposed to be floated on the market. But after much of the budget allocated for capital spending was not utilized and thus remained locked up in state coffers, the government ditched the idea of raising funds from the market.
Coupled with this, Nepal Rastra Bank also did not renew treasury bills of around Rs 7 billion recently.
At a time when the banking sector was facing shortage of money, the central bank"s decision to hold back plan to mop up funds from the market and buy back debts should have provided relief to commercial banks.
But that did not happen because of the compulsion to maintain credit to core-capital-cum-deposit (CCD) ratio at 80 percent, according to some bankers.
As per the regulatory provision on CCD ratio, banks have to keep at least Rs 20 of every Rs 100 raised in deposits in their vaults, meaning only Rs 80 can be extended in the form of loans.
“Because 20 percent of the deposit and core capital have to be kept in reserve, banks generally want to invest this amount in bonds and treasury bills, which are as good as liquid money and give returns as well,” Ajay Shrestha, the CEO of Bank of Kathmandu told Republica. “But since the supply of government investment tools was lower this year, much of the deposit raised by us could not generate good yields.”
Many bankers are griping about certain portion of their deposits virtually going to waste because of high cost associated with the purchase of money from depositors.
Many commercial banks are currently paying interest of over 11 percent on institutional deposits because of liquidity shortage triggered by the government"s lower capital spending. At the same time yields on 91-day treasury bills have fallen to 1.46 percent from around 4.7 percent in mid-April.
The yields on treasury bills are falling because demand for these bills is higher, as many banks want to invest in this tool to keep returns intact while maintaining the CCD ratio. At the same time, deposit cost of banks is increasing because they have to purchase money -- supply of which is waning due to lower capital spending -- to maintain CCD ratio.
“If the government had widened investment options, yields on treasury bills would have been higher and there would have been some stability on the market,” Shrestha said. “Because this is not happening, our cost of fund is going up. This will ultimately raise lending rates if the problem is not dealt with immediately.”
Sashin Joshi, the CEO of NIC Bank, however, did not agree with Shrestha.
“Banks can"t look for short term gains, if they want some stability in the banking sector,” he told Republica, throwing his support behind the central bank"s decision to not raise Rs 38 billion from the market and renew treasury bills worth around Rs 7 billion.
“If the central bank had mopped up funds from the market the liquidity problem would have been much more severe,” Joshi further said, informing, “The liquidity strain would ease in the coming days as government spending generally shoots up in the last month of fiscal year (i.e. mid-June to mid-July).”
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