September 13, 2023 | Investopaper
Deposits of about 63 billion rupees have flooded into commercial banks in Nepal. This influx of deposits occurred in just one day following the implementation of a new policy allowing banks to consider 60 percent of the funds held in local government accounts as deposits. The decision, initiated by the Ministry of Finance, aims to infuse much-needed liquidity into the financial system.
The move, which came into effect on Monday, was promptly adopted by the Nepal Rastra Bank, which communicated the decision to all commercial banks. The decision to allow 60 percent of the funds in local government accounts to be counted as deposits is seen as a response to several economic challenges. Nepal has witnessed high interest rates, limited avenues for investment, and a downtrodden private sector, which has dampened credit demand.
Finance Minister Prakasharan Mahat took the lead in greenlighting the new policy, sending a letter outlining the decision to Nepal Rastra Bank on Sunday. Previously, banks were permitted to consider up to 80 percent of the funds in local government accounts as deposits until the end of Ashad, 2080 BS. However, this facility was withdrawn on Shrawan 1 as the Ministry of Finance had not made a decision at the time. The recent decision reinstates the facility but at a reduced limit of 60 percent. It is worth noting that the policy does not specify a fixed duration, and the 60 percent limit is expected to be gradually reduced over time.
The Ministry of Finance has also outlined guidelines for the usage of these funds. According to the ministry, the funds acquired from banks must be directed exclusively toward productive sectors and not utilized for non-productive purposes, such as trade or import promotion.