KATHMANDU, Aug 10: Nepal Rastra Bank (NRB) has paved the way for commercial banks to make Indian currency borrowing from banking institutions of the southern neighbor.

Publishing a notice on Wednesday, the central bank said that commercial banks can take loans from Indian banking institutions in Indian currency for the purpose of lending funds to prescribed sectors like hydropower, roads, tunnel, airport, tourism and farming. 

The notice issued by the central bank’s Foreign Exchange Department comes in line with the announcement made in the Monetary Policy for Fiscal Year 2018/19. Following request from banking executives, particularly those from Indian joint venture commercial banks, the central bank has said that it would allow them to take loans in Indian currency.

According to the central bank, commercial banks can borrow up to 25 percent of their core capital, in Indian currency along with other convertible currencies. Earlier in May, the central bank allowed banks to borrow in convertible currencies like the US Dollar, Euro and Japanese Yen. The NRB has also widened the scope of borrowing to Indian currency as many banks told the central bank that it would be easier for them to turn to Indian banking institutions to borrow.

The new facility for the commercial banks was introduced by the central bank amid shortage of lendable funds in the banking system. It is expected that the borrowing from foreign banking and financial institutions in convertible currencies would address the ‘credit crunch’ which was a result of the mismatch in deposit and credit growths of BFIs. The facility was also aimed at ensuring that priority sectors do not face shortage of financial resources.

According to the NRB requirement, banks willing to take loans in Indian currency should make such decision from their board of directors. The decision will have to be approved by the central bank. The maximum interest rate on loans that banks borrow from Indian banking institutions should not be more than one percent premium on the average rate on 364-day treasury bills issued by the Indian government, according to the NRB. 

The central bank has also barred banks from paying additional fee or commission on such loans. 

The maturity period of such loan should be between a minimum one year and a maximum of five years. However, such loans can be renewed upon approval of the central bank. 

While the central bank has opened the facility for banks two months ago, only couple of banks has secured funding from international financial institutions as loans.