The country has been investing dollars to buy Indian currency

Kathmandu, June 9

The government is preparing to allow commercial banks to borrow Indian currency to bring in capital into the country to invest in sectors as defined by Nepal Rastra Bank.

Earlier, the central bank allowed only private sector projects to borrow Indian currency and banks could not borrow Indian currency from Indian banks.

Finance Minister Yubaraj Khatiwada said the government will now allow banks to borrow from India to invest in Nepal. Talking to The Himalayan Times, Khatiwada said Indian joint venture banks faced no risk in bringing capital to invest in Nepal due to fixed exchange rate regime.

For this, the country has to raise reserves in Indian currency. Nepal’s export to India and income from tourism and Nepali migrants working in India are major sources of Indian currency. However, the country spends its Indian currency reserve as imports are concentrated with India and cost of transport logistics to ferry third-country cargo via India is also paid in Indian currency.

The country has been investing dollars to purchase Indian currency. At present, the country has INR 257 billion or 23 per cent of the total foreign currency reserve. Due to lack of strong Indian currency reserves, long-term borrowing from Indian banks must be hedged. The finance minister further said there should be an institutional mechanism to manage such long-term hedging.

The central bank had earlier allowed banks to borrow from foreign banks in convertible foreign currency except Indian currency. However, Finance Minister Khatiwada said he has asked Indian joint venture banks to borrow from their partner banks in India. Citing low gross domestic saving, Khatiwada said the country needs to borrow from foreign banks and international capital markets. Banks are reluctant to borrow in dollars citing exchange rate risk and lack of forwards contract.

Bhisma Raj Dhungana, executive director of Foreign Exchange Management Division at NRB, said the central bank had discouraged banks from borrowing in Indian currency because the central bank could face loss due to fluctuation in exchange rate of dollar vis-à-vis the Indian currency.

“Nepal does not have strong reserves of Indian currency, which is why we have to give exchange facility to banks that borrow from foreign banks to pay back interest and principal amount in due course of time,” said Dhungana.

However, Finance Minister Khatiwada said the exchange rate risk was limited and banks themselves could hedge or have a forward coverage of exchange rate in short-term borrowing and for longer-term borrowing an institutional mechanism would be established.

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 two months back.

But the banks have not been successful 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.

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

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.