Nepal Rastra Bank (NRB) is working on providing refinancing facility to cash strapped banks by taking good loans of banks as collateral. The banks will get credit from the central bank at 6.5 percent.

"We are working on defining the prerequisites for providing such credit," said a senior official of NRB. Nepal Bankers Association (NBA) has however proposed to provide 15 percent of good loans. With the banking system facing liquidity crunch for more than four months, the banks made such a proposal.

As per the NRB Act 2002, NRB can make available loans and refinance commercial banks and financial institutions for a maximum period of six months against the security of various assets including good credit, government's debt bonds and deposits accumulated in the central bank.

A NRB official said that the banks requesting refinancing must fulfil all the conditions put forward by the central bank to avail credit. "We may ask them to change board members too."

Other proposals of the NBA are -- the NRB should reduce cash reserve ratio to 4.5 percent from the current 5.5 percent, postpone the date of increasing statutory liquidity ratio to 8 percent to the next fiscal year and continue providing repo (central bank providing finance to banks against their treasury bills). "Another proposal was that the government must issue an official statement regarding rumours about change in exchange rate between Nepali and Indian currencies," said Sashin Joshi, president of NBA.

Central bank officials ruled out the possibility of cutting the CRR. "Cutting CRR will be counter productive, it will increase credit while we are on the move to control credits," said the official. But, Joshi said that cutting CRR would ease cash crunch to some extent as it would avail about Rs. 6 billion in the banking system. He ruled out the possibility of more credit flow as a result of CRR cuts.

According to NRB officials, the bankers also demanded central bank cap on the interest rate on institutional deposits at 12 percent.  But, Joshi rejected the NBA made any such proposal officially to the central bank.

Currently, the institutional depositors have been charging interest up to 14 percent on their fixed deposits. The institutional depositors such as insurance companies, Employee Provident fund and Citizen Investment Trust have deposits of Rs.18.15 billion, Rs. 21.15 billion and Rs. 5.89 billion respectively with the commercial banks as of mid-January 2010.

 "Capping on deposit rate is very unpractical as it will invite pressure to cap on the lending rate too." The entrepreneurs have already told the government that their businesses could not be feasible with the increased lending rate.

According to NRB, the problem arose as result of excessive lending against slow deposit collection. "The crisis will not be over until this discrepancy is addressed," said the NRB official. "It will take at least two more months to normalise the situation." As a result of the cash crunch, banks and financial institutions have almost stopped all new loans currently.
Courtesy: The Kathmandu Post