Kathmandu, August 8 Nepali commercial banks are now allowed to borrow funds from Indian banks to invest in designated areas recommended by Nepal Rastra Bank.
The Monetary Policy 2018-19 has introduced a facility for loanable-funds-starved commercial banks to borrow from the Indian banks and the circular issued by the Foreign Exchange Management Department of the central bank has defined the terms and conditions for borrowing funds from the Indian banks.
The interest rate of the borrowing can be one percentage point higher than the 364-day average rate of Indian Treasury Bills.
Banks cannot offer additional fees and commission to the lender and they cannot keep any collateral, guarantee, or bank guarantee to avail loans from Indian banks.
Banks must take approval from their respective board and also from the central bank before obtaining such loans. They must notify the central bank regarding the loan amount availed from the Indian banks and the repayment of principal and interest. Such loans can be availed for one to five years and can be renewed if central bank grants permission, as per the circular issued today.
The borrowed funds must be lent to the designated sectors, namely, for hydroelectric projects, laying transmission lines, constructing roads, tunnels, airports, cable car projects, bridges and other physical infrastructure (except non-tradable sectors like land, real estate development), tourism, agriculture and for issuing micro credit.
“If a bank has already obtained loans in convertible foreign currency, the optimum floor to avail loan in convertible foreign currency and Indian currency is 25 per cent of the core capital or tier 1 capital,” reads the circular.
Core capital of commercial banks in Nepal hovers at around Rs 320 billion.
The banks interested to avail loans must comply with regulatory requirement of capital adequacy ratio. Similarly, banks cannot borrow from the financial institutions of India that are barred from conducting cross-border transactions by Reserve Bank of India.
Commercial banks must also abide by all national and international laws related to anti-money laundering/combating the financing of terrorism, as per the circular issued today.
The Monetary Policy of this fiscal announced borrowing from the Indian banks would be allowed as per the suggestions of Indian joint venture banks operational in Nepal. The central bank had allowed borrowing in convertible foreign currency in first week of April this year. However, central bank had not opened borrowing in non-convertible foreign currency at that time.
With the provision of the Monetary Policy 2018-19 coming into effect with the circular issued today, joint venture banks believe that they will be able to bring in funds from their partner banks to float credit in Nepal, thereby easing the credit crunch situation.