The Nepal Rastra Bank (NRB), the central bank, is mulling over framing a guideline to allow commercial banks to borrow money from foreign financial institutions to replenish the stock of loanable funds.

The central bank currently allows domestic banks and financial institutions to borrow money from foreign banking institutions and other agencies. Such debt could be treated as deposits by domestic banking institutions. But due to lack of a proper guideline, Nepali banks have not been able to make use of this facility.

“We are now planning to formulate a guideline to enable banks to acquire loans from abroad,” said NRB Spokesperson Narayan Prasad Paudel. “We are currently holding discussions on whether banks should be given a ceiling on foreign borrowing and whether threshold should be created on lending rate as well.” The guideline, according to sources, may also include areas where loans obtained from abroad could be channelled.

The permission to borrow funds from abroad could help banks that are facing severe shortage of funds that could be disbursed as loans. Yet the downside of this facility is fluctuation in exchange rate, which could inflate debt servicing cost of banks. In other words, if Nepali rupee weakens rampantly, those who have borrowed funds in convertible currency may have to fork out huge sum to repay the debt. This may even push banks to the verge of collapse, triggering an economic meltdown. Possibilities of such an accident taking place cannot be ruled out, as seeds of the Asian Financial Crisis of 1997 were sown by companies and financial institutions that heavily relied on foreign debt to expand their businesses.

This is the reason why central bank is planning to create a threshold on borrowing amount and interest rate. Also, the value of Indian currency, with which Nepali rupee is pegged, has not fluctuated in an abnormal manner and macroeconomic indicators of India are not that bad. These factors have also encouraged the central bank to contemplate on allowing banks to acquire foreign loans.

“Reliance on foreign loan, for the time being, can reduce our cost of fund as such credit can be obtained at annual interest of 4 to 5 percent. So, even if we factor in foreign exchange risk, the lending rate on foreign loans would not go beyond 11 percent, the return that we are providing on fixed deposits,” said Sanima Bank CEO Bhuvan Kumar Dahal.

Many commercial banks have currently stopped providing credit to borrowers as they do not have much funds for loan disbursement. This problem cropped up after banks failed to strike a balance between deposit collection and credit disbursement.

Banks are lately witnessing deceleration in deposit growth due to deceleration in remittance income and slow public expenditure. On the other hand, there is huge demand for credit due to relative improvement in business climate.

Currently, banks are allowed to extend 80 percent of their total deposit and core capital as loans. This is known as the credit to core-capital-cum-deposit (CCD) ratio. The average CCD ratio of commercial banks currently stands at around 78 percent, while three banks are said to have breached this lending limit recently.