Kathmandu, July 18

The borrowing facility for domestic banks from foreign financial institutions and the provision of hedging the borrowed amount will augment the loanable funds, according to Nepal Rastra Bank (NRB).

“The borrowing facility introduced in April of this year has been further reinforced by the hedging facility to cover the exchange rate risks and borrowing facility in Indian currency,” said Nara BahadurThapa, executive director of Research Department under the NRB.

The Monetary Policy for fiscal 2018-19 has targeted to mobilise resources from the financial sector to achieve eight per cent growth target of the government.

The Monetary Policy has tried to resolve the problem of credit crunch and resulting high lending rates by bringing in capital from abroad, expansion of refinancing facility and bringing down cash reserve ratio (CRR) and statutory liquidity ratio, according to Thapa.

The Monetary Policy has allowed banks to borrow in Indian currency considering Nepal’s trade dependence with India. However, it is reported that banks can borrow from Indian banks only to settle the payments in India as per the rules of Reserve Bank of India. NRB Executive Director Thapa said that the central bank has been studying how the borrowing facility from India can be implemented effectively.

Regarding the expansion of refinancing window to Rs 35 billion from Rs 25 billion, Thapa said that Rs 15 billion is non-funded. “We have only

Rs 20 billion in funds available for the refinancing facility, but we will use the prerogative of the central bank of printing notes to ensure the subsidised credit facility for the productive sector,” said Thapa.

Stating that the reduction of CRR from six per cent to four per cent will generate Rs 48 billion liquidity in the banking system, Thapa said that it will help to bring down the base rate of the banks as they will be able to invest additional funds in government securities and earn interest from that.

Similarly, the central bank has also brought down the interest rate spread to 4.5 per cent from five per cent citing that the financial institutions cannot be efficient with high cost of financial intermediation, as per Thapa. Instead of capping the interest rate, the central bank has minimised the intermediation cost, which is interest rate spread or difference between lending and deposit rates.

He further stated that the Monetary Policy has brought down the standing liquidity facility (SLF) rate to 6.5 per cent while short-term deposit rate (two-week deposit collection rate) has been increased to 3.5 per cent. The SLF rate is upper bound and short-term deposit rate is lower bound of interest rate corridor for government securities, interbank rate and other short-term interest rates. In this regard, banks will be able to obtain 3.5 per cent interest rate in two-week deposits, when central bank mops up liquidity and can borrow from the central bank at 6.5 per cent. “The interest rate corridor is expected to be an anchor to stabilise the deposit and lending rates in the future,” as per Thapa.

Nepal Bankers’ Association President Gyanendra Prasad Dhungana hailed the hedging facility on foreign borrowing. However, narrowing the interest rate spread and the 80 per cent ceiling for credit to core capital plus deposit (CCD) ratio will not ease the current banking problems, he said.

According to him, the Monetary Policy should have expanded the ceiling of CCD ratio to 85 or 90 per cent to ease the current challenges of credit crunch as minimising the CRR will generate liquidity but cannot generate loanable funds.

Bankers also pointed out  that the government’s announcement of developing mega projects like Budhigandaki and West Seti utilising internal resources will further deepen the current challenge of lack of loanable funds.

“We have to bring in foreign investment in mega projects to resolve the challenge of credit crunch instead of thinking about developing them by mobilising own resources,” said Dhungana.