August 22, 2023 | Investopaper
In a recent development, the government is set to revise the method of considering local level funds as deposits, with Finance Minister Dr. Prakash Sharan Mahat making the announcement. The decision, effective from Bhadra, will allow banks to include 60 percent of the local level funds as part of their deposit calculations.
Minister Mahat’s directive targets a phased transition, aiming to permit 60 percent of local level funds to be counted as deposits until Chaitra’s end 2080 BS. Previously, on Shrawan 2, 2079 BS, the former Finance Minister Janardan Sharma had augmented the allowance of counting local level funds as deposits from 50 to 80 percent, citing a scarcity of investable capital in the financial sector. This privilege was in effect until Poush end, 2079 BS. Subsequently, on Poush 8, Sharma extended the allowance until the end of Ashad end 2080 BS, permitting 80 percent of local level funds to be considered as deposits.
Following a Ashad instance where the Ministry of Finance had to implement a reverse repo due to excess liquidity in financial institutions, the Ministry opted not to further extend the deadline for factoring local level funds into deposits beyond Ashad. However, in light of heightened interest on deposits due to diminished deposits in bank financial institutions, Minister Mahat has determined that 60 percent of local level deposits can be counted until the end of Chaitra.
It’s important to note that banking entities have expressed differing viewpoints on this matter. Bankers had advocated for a full inclusion of 100 percent of the local level funds in deposit calculations. In response to this change, the Nepal Bankers Association has noted that the base rate of commercial banks will rise by 0.2 percentage points, given that local level funds can no longer be factored into deposits. This association had initially requested full recognition of local level funds as deposits.
Despite the modification from 80 percent to 60 percent, financial experts opine that the impact on the base rate will be minimal. When government funds are deposited within banks, these funds cannot be classified as conventional deposits, and loans cannot be extended against them. Instead, banks and financial institutions can use the funds allocated by the Ministry of Finance specifically for deposit calculations, which, in turn, helps manage the loan-to-deposit ratio. This alteration in deposit calculation holds implications for liquidity and potential loan investments, influencing the base rate while keeping in mind that interest on government funds is not accrued, thereby exerting a downward pressure on the banks’ base rate.