As per Nepal Rastra Bank estimates, the banking system has excess liquidity of around Rs 43 billion. However, citing low investor confidence and higher lending rates, the private sector has refrained from taking loans from banks.[break]
The private sector has argued that only lower rates will motivate them to take loans. However, the high-level Financial Sector Monitoring Committee headed by the Finance Minister that met on Tuesday brushed aside the contention, assessing that it would drive down deposit rates as well.
“We cannot let the deposit rates go down from those in India as it will trigger a flight of capital from the country and from the formal banking sector to informal sectors,” said a senior official at the Ministry of Finance (MoF). He disclosed that the committee instead instructed MoF and Nepal Rastra Bank (NRB) to immediately finalize internal borrowing schedules, paving the way for treasury bonds (TBs), bonds and other instruments to mop up excess liquidity from the system.
The government in its budget for the current fiscal year has announced to mobilize Rs 37.41 billion in domestic borrowings.
Apart from that, the high-level committee also endorsed the capital plan of Nepal Bank Limited (NBL), which was approved by NRB with some conditions, paving way for the NBL management to move ahead with its recapitalization plan.
“The meeting decided to give its nod to NBL capital plan even though its execution will seek the government to inject about Rs 1.50 billion in the bank,” said the source.
The government that holds 40 percent share in the bank has a responsibility of injecting additional capital if the NBL recapitalization plan is to succeed.
“Still, we decided to let NBL move ahead with the plan because we can ask public entities and NBL employees to take the rights share of the government,” said the source.
The committee also discussed the handing over of NBL management to independent professionals. It asked MoF to carefully study the pros and cons of possible merger of Rastriya Banijya Bank (RBB) and Nepal Industrial Development Corporation (NIDC) -- two other ailing state-owned bank and financial institution.
The committee discussed the ways to motivate commercial banks to cut lending rates without impacting deposit rates. However, it did not make any recommendations to NRB in this connection.
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