KATHMANDU, May 14: Nepal´s financial system that has long been suffering from suffocating shortage of liquidity is likely to get a fresh relief as the central bank is all set to release a huge amount of refinance to financial institutions through its new instrument from next week.

A central bank official told myrepublica.com that of the six banks that have applied for refinance, which the Nepal Rastra Bank (NRB) recently introduced to lend commercial banks against good loans they own, two will get the refinance next week.

One of the main purposes of this refinance arrangement is to avert possible financial crisis that might hit the financial sector at the end of current fiscal year, said an NRB official.

Experts fear that the volume of non-performing loans and loan loss provisions of financial institutions will go up alarmingly at the end of fiscal year, as borrowers might be unable to serve their last quarter payments due to deepening recession in the realty sector.

An official familiar with the development said that Citizen Bank International and Clean Energy Development are among the banks that are in the front row to receive the facility. The two banks are most likely to get the refinance within the next week, said the official.

Citizen Bank has applied for refinance worth Rs 548 million while Clean Energy Development Bank has asked for Rs 140 million, said the official. The official also informed that decision on the applications by four other financial institutions will also be taken soon.

Earlier, a month ago, NRB had decided to introduce a new refinance to financial institutions against the collaterals of good loans that the institutions own to deal with the worsening liquidity condition.

In order to deal with the lingering acute shortage of liquidity that fuelled inter-bank lending rate to over 13 percent, the NRB has maintained an additional liquidity injection worth Rs 15 billion into the market. We plan to slowly withdraw the additional injection from the market once the refinance gets into the market, said the NRB official.

The refinance will be made available to financial institutions at an annual rate of 7.5 percent and the financial institutions are required to invest the refinance at up to 10.5 percent in the private sector. Financial institutions can obtain such refinance of up to 40 percent of their primary capital.

The NRB has specified six sectors -- tourism, hydropower, exports, agriculture, small and medium scale industry and other productive sectors. The refinance will be available for a period of six months and those financial institutions interested in renewing the loans are required to produce new collaterals of good loans.

courtesy:myrepublica