Jun 26, 2017- Nepal Rastra Bank (NRB) has been mulling to increase the size of its refinancing fund.
The central bank is holding talks with officials of the Prime Minister’s Office (PMO) to expand the reserve which currently stands at Rs10 billion.
Refinancing is a facility provided by NRB to banks and financial institutions (BFIs) under which they get funds at a certain interest rate which they lend to businesses by adding a markup as their service charge.
NRB introduced the refinancing facility to channelise loans to priority sectors at an interest rate lower than the prevailing market rate.
Speaking at the interaction programme organised by the Confederation of Nepalese Industries (CNI) to provide suggestions to the central bank on the upcoming monetary policy, Nara Bahadur Thapa, executive director of the Research Department at NRB, said they were giving serious consideration to increasing the size of the refinancing fund.
“We had a couple of rounds of talks with secretaries of the PMO, and we have found them to be serious about increasing the size of the refinancing fund,” said Thapa.
The central bank moved to expand the fund following complaints by BFIs and the private sector that it was too small. Nepali businesses have been complaining that they are not getting refinancing facility due to lack of funds.
Thapa did not say by how much the refinancing fund would be increased, but CNI has proposed that it be boosted to Rs200 billion.
“The size of the refinancing fund must be equivalent to 10 percent of the total lending by the banking sector which is Rs2,000 billion,” the CNI said in a statement. “If NRB can’t increase the size to Rs200 billion immediately, it should set aside Rs100 billion for the fund for the time being.” If the size of the fund is increased, it will be instrumental in resolving the credit crunch being faced by the financial sector currently.
Similarly, NRB has indicated that it might bring down the interest spread, the difference between the lending and deposit rates, from the existing 5 percent which was set a few years ago. “NRB is not happy with the existing rate as BFI profits are surging every year while businesses are finding it difficult to survive due to high interest rates,” said Thapa.
“This will neither help the economy nor contribute to the development of the private sector.” The CNI also suggested that the relaxation on the calculation of the credit to core-capital-cum-deposit (CCD) ratio be continued for a longer period as it is scheduled to run out at the end of the fiscal year.
NRB recently allowed banking institutions to calculate the CCD ratio by deducting 50 percent of the loans extended to the productive sector to ease a credit crunch.
BFIs are allowed to extend up to 80 percent of their total deposits and core capital as loans. This is the maximum regulatory lending limit, or in technical terms, the maximum limit on the CCD ratio.
Source: The Kathmandu Post