Issuing the new directives, Nepal Rastra Bank (NRB) on Wednesday opened category A bank and category B financial institution of national level to invest on overseas derivatives instruments. [break]This would enable the financial institutions to better manage their foreign currency portfolio and cope with risks from the exchange rate volatility, said the central bank officials.
Going by the directives, commercial banks and national-level development banks can now invest on various types of less risky instruments like debentures and certificates of deposit issued by the international financial institutions (FIIs) and foreign governments.
"The maturity period of those instruments should preferably be one year or less," read the directives.
The directives do not restrict BFIs from putting their money on less risky instruments of up to two years though. However, it cites that the volume of investments that they can made on more than a year old instruments should not exceed 30 percent of their total convertible currency reserve at foreign agency banks.
Likewise, in the currency market, they can invest on derivatives instruments such as forward, futures, options and swap, among others.
However, those investments should be made from convertible currency reserve and deposits that they hold in the foreign agency banks. “They are not allowed to make such investments by acquiring loans from any international and foreign banks and financial institutions,” read the directives.
In a bid to facilitate such investments, the central bank has also allowed the commercial banks and national-level development banks to park all their convertible currency deposits in foreign agency banks as reserve. They, however, need to have a forward exchange contract with the foreign agency banks.
For the forward exchange facility, the NRB has allowed the investing commercial and development banks to set the forward exchange rate themselves and carry out transactions only after ascertaining actual need of the applicants.
“As NRB does not provide any cover on forward exchange transactions, the investors themselves will be liable for benefits and losses emanating from those transactions,” the central bank has cautioned.
The commercial and development banks, however, would need to make sure that their investments do not affect daily liquidity of foreign currency holding.
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