Kathmandu, February 12

Nepal Rastra Bank (NRB) — the central regulatory and monetary authority — has instructed the banks and financial institutions (BFIs) to submit the monthly details of loan expansion to the productive sector within 15 days of the following month.

Issuing a circular to the class ‘A’, class ‘B’ and class ‘C’ financial institutions, the central bank has asked the BFIs to submit the details after witnessing the rampant lending to the unproductive sector.

“Loan growth of the BFIs in the productive sector was almost half of the loan growth in unproductive sector in the first half of this fiscal,” said Deputy Governor Chinta Mani Siwakoti.

The current move of the central bank is expected to regulate the credit flow of the BFIs to the productive sector, which will result in multiple benefits, like boosting productivity, generating employment, among others.

As per the provision of the NRB, the class ‘A’, class ‘B’ and class ‘C’ financial institutions should mandatorily float 20, 15 and 10 per cent, respectively, of their loan portfolio to the productive sector. Moreover, the class ‘A’ financial institutions have to extend 15 per cent of the total loan to the agriculture and energy sectors.

However, loan expansion to the productive sector in this fiscal has been weak and it seems unlikely that the BFIs will be able to meet the target set by the central bank, according to NRB officials. “This is because the BFIs are running out of loanable funds, which will affect their loan expansion in the second half of the fiscal.”

BFIs have been seeking additional refinancing facility from the NRB to meet the target given by the regulatory authority to lend to the productive sector.

Banks can obtain refinancing facility of up to 25 per cent of their core capital. The central bank can extend such refinancing worth Rs 11 billion, which has already been pledged to the BFIs, according to the NRB officials.

If the BFIs fail to meet the target set by the NRB, they would need to pay the penalty to the central bank. As per monetary policy of 2016-17, in case the minimum amount of credit is not extended to specified productive sector as per the current provision, penalty at bank rate will be charged on shortfall of such amount of credit.