An NRB circular, in line with the monetary policy, lets Nepal’s Class ‘A’ banks borrow from Indian banks, but confusion persists

The Nepal Rastra Bank (NRB) unveiled its monetary policy for the fiscal year 2018-19 a month ago, allowing the country’s leading commercial banks for the first time even to borrow loans in the Indian currency from Indian banks to make investments in the productive sectors identified by the central bank. The monetary policy has introduced this facility to the loanable-funds-starved Class ‘A’ commercial banks to borrow loans from Indian banks. The Foreign Exchange Management Department (FEMD) of the central bank has also issued a circular defining the terms and conditions for borrowing funds from the Indian banks. As per the monetary policy, a commercial bank can borrow funds up to 25 per cent of its core capital. As per the circular, the interest rate of the borrowing can be one percentage point higher than the 364-day average rate of Indian Treasury Bills. The circular has also barred the commercial banks from offering additional fees and commission to the lender. They also cannot keep any collateral, guarantee or bank guarantee to avail loans from the Indian banks. It is also mandatory to take approval from their respective boards of directors and also from the central bank before obtaining such fund. They also need to notify the central bank about the loan amount to be availed from the Indian banks and about the repayment scheme.

The central bank has stated that such loans can be availed for a period of one to five years. It can be renewed after getting permission from the NRB. The money borrowed thus should be invested in sectors such as hydroelectric projects, transmission lines, constructing of roads, tunnels, airports, cable car, bridges and in tourism, agriculture and other physical infrastructure. The government has identified them as the productive sectors helping to boost the country’s economy. However, the commercial banks must abide by all national and international laws related to anti-money laundering and combating the financing of terrorism.

With the circular issued on Wednesday by FEMD, a couple of Nepal-based Indian joint venture banks may avail loans in the non-convertible Indian currency. These joint venture banks, according to officials at the central bank, will be able to receive loans in the Indian currency as the Indian government has allowed circulation of its currency in Nepal and Bhutan. This provision, introduced for the first time, will, to some extent, ease the cash-starved commercial banks to receive loans in the Indian currency and, they can inject money into the designated sectors. However, it is still unclear whether the NRB unveiled this policy after going through official consultation with the Reserve Bank of India (RBI), which allows its commercial banks to lend money only in US dollar outside the country. The NRB officials familiar with the policy said they had simply “opened the window” for Nepal’s commercial banks to obtain loans in the non-convertible Indian currency. It is also unclear whether the RBI will allow its commercial banks to lend money to Nepal’s joint venture commercial banks in the Indian currency. This is an issue that needs to be clarified before expecting anything positive from the NRB’s monetary policy and FEMD’s circular.

Information is key

Accountability and transparency is a sine qua non of good governance. Good governance can be ensured only when citizens are served by their representatives and not ruled by their representatives. Citizens can get the sense of good governance only when there are effective and efficient institutions to provide support to citizens to make their life safe and productive.

In the new federal set-up the country has embraced, there is an urgent need to develop the culture of seeking and providing information at all levels so as to institutionalise federalism and ensure good governance. Unless there is a free flow of information, democracy cannot thrive, and if there is no participatory democracy, good governance will remain a pipe dream. Good governance is possible only when citizens have the access and right to information. Hence, all concerned must make a push for ensuring the right to information, as it empowers citizens and strengthens democracy. A thriving participatory democracy sets the ground for good governance.