NRB lenient with BFIs not meeting priority sector lending requirements

Published On: March 22, 2019 07:58 AM NPT By: Republica  | @RepublicaNepal

KATHMANDU, March 22: Nepal Rastra Bank (NRB) has shown flexibility in taking action against bank and financial institutions (BFIs) that are not floating loans to priority sectors as required by its rules.

Issuing a new circular, the central bank deferred the date to start imposing fines to BFIs that fail to meet the directed sector lending requirement. This relaxation means BFIs, who have failed to extend minimum loan requirements in prescribed priority sectors, will face central bank’s action only from mid-January.

Previously, BFIs flouting the priority sector lending requirement were subject to the NRB’s fine from mid-July the previous year. The new circular has made amendment to the provision in the ‘Unified Directives for 2075 (2018/2019)’, providing some relief to BFIs that have flouted the rule until mid-January.

Under the priority sector lending requirements of the NRB, banks must float at least 25 percent of their total loans to priority sector, while such requirement is 15 percent for development banks and 10 percent for finance companies.

Out of 25 percent of lending requirement to priority sectors for commercial banks, 10 percentage point of loans must be floated to agriculture sector while remaining 15 percentage points for energy and tourism sector.

The central bank imposes fines to BFIs for the shortfall in lending requirement to priority sector in quarterly basis. According to the rule, the central bank charges interest on the shortfall fund as a penalty. The highest interest rate toward lending of the respective BFIs gets applied for the purpose of the fine calculation. 

Many BFIs are struggling to meet the requirement of directed sector lending. Some are willing to pay fine to the central bank instead of making serious efforts to meet the directed sector lending requirement, according to an NRB source.

Data compiled by the NRB shows, commercial banks have floated 18.54 percent of their total loans to the priority sectors, falling short of 6.46 percent of loans to meet the minimum requirement.

The data shows that commercial banks have floated 9.93 percent in agriculture sector, 4.21 percent in energy sector and 4.4 percent in tourism sector compared to the requirement of 10 percent in agriculture sector and 15 percent in energy and tourism sectors.

A banking executive told Republica that the central bank’s flexibility will allow BFIs to meet the requirement in a gradual way. 

NRB Spokesperson Narayan Prasad Paudel, however, defended the move. “The earlier provision would have required us to penalize most of the commercial banks,” said Poudel, who is also the chief of Banks and Financial Institution Regulation Department of the NRB. “We do not want the rule to affect the system.

The commercial banks will have to meet the priority sector lending requirement now onwards. Otherwise, they have to face fine,” he added.

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