Money
NRB introduces goodies, while tightening noose around banking sector
The Nepal Rastra Bank (NRB), the central monetary authority, on Monday, came up with goodies for banks and financial institutions engaged in genuine business, while tightening the noose around those trying to generate undue profit by manipulating the loopholes prevalent in banking guidelines.Rupak D. Sharma
The Nepal Rastra Bank (NRB), the central monetary authority, on Monday, came up with goodies for banks and financial institutions engaged in genuine business, while tightening the noose around those trying to generate undue profit by manipulating the loopholes prevalent in banking guidelines.
These measures, in entirety, are expected to ease the shortage of loanable funds at banks and financial institutions, and root out malpractices that were tarnishing the image of the entire banking sector.
To replenish the stock of loanable funds, the NRB has allowed banks and financial institutions to calculate credit to core capital-cum-deposit (CCD) ratio by deducting 50 percent of loans extended to the productive sector.
Banks and financial institutions extended credit of Rs254 billion to the productive sector till mid-January. Since banking institutions no longer have to take into account 50 percent of these loans while calculating the CCD ratio, banks and financial institutions now have around Rs127 billion in loanable funds.
“This provision will be valid till mid-July,” NRB Governor Chiranjibi Nepal told a programme organised to conduct mid-term review of the Monetary Policy on Monday.
Currently, banks and financial institutions are allowed to extend 80 percent of local currency deposit and core capital as loans. This in technical term is referred to as the CCD ratio.
As of February 3, this ratio hovered around 79 percent, providing very little room to banking institutions to extend loans. “The latest measure introduced by the NRB has boosted the confidence of the banking sector,” said Anil Shah, president of the Nepal Bankers’ Association, an umbrella body of commercial banks. “We hope this measure will ease the shortage of loanable funds in banks and financial institutions.”
On Monday, the NRB also allowed banks to issue foreign currency-denominated letters of credit for a period of 90 days. The provision introduced for the first time is expected to lower the cost of credit for traders, as banks are currently in a position to extend foreign currency loan at a lower interest rate, according to Sanima Bank CEO Bhuvan Kumar Dahal.
At present, banks are offering interest of less than a percent on foreign currency deposits, as against up to 12 percent on local currency deposits. Such lower cost of fund enables banks to provide foreign currency loans at 3 to 4 percent interest.
The downside of foreign currency credit, however, is exchange rate fluctuation. This threat can be eradicated by purchasing a hedging instrument, which can cost 3 to 4 percent of the credit amount. This means foreign currency loan can be acquired at 6 to 8 percent interest, as against interest of up to 15 percent levied on local currency credit.
To further facilitate trade financing, the NRB has allowed banks to issue trust receipt loans and other similar loans aimed at settling import bills for a period of up to 150 days from existing 120 days. This provision will remain effective till mid-July.
While the NRB has eased credit disbursement rules for the trading sector, it has tightened the reins around individual borrowers, who seek revolving loan facilities, such as overdraft.
The central monetary authority has reduced the threshold for such loans to Rs7.5 million from existing Rs10 million.
The NRB came up with this provision, as most of the overdraft sought by individuals is diverted towards unproductive sectors, such as real estate and stock market, which tend to drive up asset prices and fuel inflation.
The NRB has also directed banks and financial institutions to categorise multi-bank loans-credit acquired from multiple banks usually on the back of the same collateral-that are yet to be converted into consortium loans as ‘watch list’ credit. Banks need to set aside 5 percent of the credit amount to cover risk created by loan classified as ‘watch list’.
On the other hand, credit extended to borrowers, who have submitted different financial statements at different institutions, such as bank and revenue offices, should be categorised as ‘bad loans’, the NRB has said. Banks need to set aside 100 percent of the credit amount to cover risk created by bad loans.
To further tighten the noose around banking institutions that seek to exploit loopholes, the NRB has said interest on call deposit should not exceed that of normal savings deposit.
Call deposits are current account deposits that can be withdrawn any time. Recently, banks were found extending loans in a haphazard manner and exceeding the lending limit, or CCD ratio, of 80 percent. Such institutions were then found luring finance companies to deposit funds in call accounts at the end of every quarter by offering higher interest rate so as to meet the CCD ratio. The NRB had called this “window dressing”.