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‘Borrowing facility from foreign banks insufficient to address country’s credit need’

2018-07-13

The government’s move to allow banks to borrow in Indian currency along with convertible foreign currency may be unable to fulfil its purpose of easing credit crunch as ‘the threshold of 25 per cent of the core capital is insufficient in terms of financing needs of the country’ as per the bankers.

Through Monetary Policy 2018-19 unveiled on Wednesday, Nepal Rastra Bank (NRB) has introduced the new provision permitting banks also to borrow in Indian currency.

“However, the provision will have limited impact as the ceiling of 25 per cent has not been revised,” said Anookul Bhatnagar, managing director of Nepal SBI Bank.

Under the provision of 25 per cent of the core capital, banks can obtain loans of around Rs 80 billion as the core capital of banking industry is around Rs 320 billion.

SBI had floated a proposal to the central bank seeking permission to borrow from India to meet the requirement of the whole banking industry in Nepal, which has been facing perennial challenge of credit crunch, which has resulted in high lending rates.

Finance Minister Yubaraj Khatiwada had taken the initiative to allow the banks to borrow in Indian currency as well. He had also asked the chiefs of Indian joint venture banks – which had assured they could bring in capital from India to lend in the designated areas – to borrow from their partner banks.

The Monetary Policy 2018-19 also introduced the provision of forwards contract in exchange rate risk in the convertible foreign currency borrowing as there is no exchange rate risk due to fixed interest rate with Indian currency, according to Nara Bahadur Thapa, executive director at NRB.

“The country does not have strong reserve position of Indian currency. While repaying loans borrowed in Indian currency, the country might have to sell dollars in the Indian market to provide Indian currency to the banks to pay back their loans.” The exchange rate risk in dollar is similar to convertible foreign currency though Nepal and India have fixed exchange rate regime.

The country has been investing in dollars to purchase Indian currency. At present, the country has INR 257 billion, which is 23 per cent of its total foreign currency reserve, according to the central bank.

To minimise the risk in borrowing Indian currency, the country has to raise reserves in Indian currency. Nepal’s exports to India, income from tourism and Nepali migrants working in India are the major sources of Indian currency. However, the country spends its Indian currency reserve as imports are concentrated with India and payments for transport logistics to ferry third-country cargo via India and by students studying in India and those who travel to India for medical check-ups are made in Indian currency

The central bank had provided borrowing facility to commercial banks in convertible foreign currency from foreign banks based on the authority extended by Foreign Exchange (Regulation) Act, 1962 in April. Half a dozen banks have since approached the International Finance Corporation, but have been unsuccessful in borrowing from foreign banks.

As per the facility, commercial banks can borrow up to 25 per cent of their core capital in convertible currency from foreign banks to lend to hydroelectric projects, lay transmission lines, construct roads, tunnels, airports, cable car projects, bridges and other physical infrastructure, tourism, agriculture and for the purpose of issuing micro credit.

The interest rate and additional fees charged by the lender can be up to a maximum of three per cent plus the six-month average of London Inter-bank Offered Rate, as per the NRB provision.

Source: The Himalayan Times