Fiscal policy helps restore public faith

DIKSHYA SINGH

KATHMANDU: The fiscal policy for the current fiscal year was successful in restoring the faith of the public in the banking system, yet fell short of few promises.

The annual budget for this fiscal year had tried to address the crisis of confidence of the general public on the financial sector as financial institutions were fighting to stay afloat amid the liquidity crisis and cases of bad corporate governance a year back.

Last year, before the budget was announced, the financial system was going through an unprecedented liquidity crunch contracting the lending capacity of the banks.

Likewise, a month before the budget was announced, five financial institutions were on the brink of a meltdown due to liquidity shortage and bad corporate governance. In order to rebuild the trust of the public in the banking system, the budget had announced deposit insurance for class ‘A’ financial institutions as well and gradually increased the amount that needed to be compulsory insured to Rs 500,000.

At that time, Nepal Rastra Bank (NRB) had brought class ‘C’ and ‘B’ financial institutions under the deposit insurance net. “The coverage of deposit insurance to all financial institutions has definitely helped in restoring the trust of the common people regarding the safety of their deposits,” pointed out spokesperson for NRB Bhaskar Mani Gyanwali.

However, neither the Deposit and Credit Guarantee Corporation (DCGC) nor Nepal Rastra Bank has pursued the matter of increasing deposit insurance base to Rs 500,000 from the current Rs 200,000. The government has already granted DCGC Rs 500 million as pledged in the budget.

Likewise, the budget also had introduced a provision for voluntary declaration on deposits exceeding Rs 1 million unlike earlier when depositors had to furnish the source of income while making large deposits, discouraging people to deposit money at banks.

These measures might have been able to cure the problem of liquidity shortage but this time liquidity flush has become a headache for all.

The hoarded money with financial institutions and the absence of viable projects to finance has only increased the cost of fund of financial institutions without any downward movement of interest rate. “The coming policies –– both fiscal and monetary –– need to figure out ways to channel the surplus funds in the banking system to productive channels,” said spokesperson Gyanwali.

Moreover, to expand banking access to rural areas through microfinance services, the budget had announced to formulate an additional legal framework which has not happened so far. This year’s budget had tried to encourage the merger

of financial institutions by waiving registration fees. Though

it was not enough to induce mergers, market forces worked its magic and seven pairs have merged and 12 more pairs are

in the process.