Banks reluctant to take foreign currency loans for lack of hedging solutions

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Jun 14, 2019

Commercial banks are reluctant to take foreign currency loans as Nepal Rastra Bank has not launched hedging solutions to reduce investment risks.

Hedging is a risk management strategy used to reduce the risk due to fluctuations in the asset price. It is also a type of insurance that will cover additional liability created to any party (investor or government) due to exchange rate fluctuations.

After the hedging regulation was implemented last February, Nepal Rastra Bank had planned to launch hedging solutions. Four months have already passed since the regulation was enforced.

Laxmi Prapanna Niroula, spokesperson for the central bank, said they had started consultations with stakeholders to launch hedging solutions in the next fiscal year. “However, the hedging solution will be effective only after the country receives a credit rating from international credit rating agencies,” said Niroula.

Finance Minister Yuba Raj Khatiwada had time and again stressed the need to implement a credit rating system to attract foreign investment. Niroula said that the credit rating would help to boost investor confidence in the country.

Nepal Rastra Bank has been encouraging commercial banks to obtain loans from foreign companies in a bid to ease the liquidity crunch. However, only a few banks have followed the advice due to the absence of a hedging solution, said bankers.  NMB Bank has taken a Rs16 billion project loan, the largest so far, from Netherlands Development Finance Company, a Dutch development bank. As Nepal Rastra Bank is preparing to introduce the annual monetary policy for 2019-20, bankers have urged the central bank to immediately launch hedging solutions.

Gyanendra Prasad Dhungana, president of the Nepal Bankers’ Association, said the implementation of hedging solutions would encourage banks to obtain loans from foreign banks. As per the plan, the central bank will provide hedging solutions by insuring the loan amount that banks borrow in foreign currency. Dhungana said the central bank would share risks by charging an insurance premium.

The central bank has allowed Nepali banks to take loans from Indian banks and financial institutions from last December. Domestic banks will use these loans to issue credit in the tourism, agriculture and micro finance sectors.

However, domestic banks have been unable to benefit from this provision as the Indian central bank has barred Indian banks from providing loans to foreign banks. “We have asked the central bank to initiate talks with the Reserve Bank of India on the issue,” said Dhungana.

Nepal Rastra Bank allows banks to take foreign currency loans equivalent to their primary capital. The association has urged the central bank to remove restrictions regarding eligible sectors when banks issue loans using funds obtained from foreign organisations.

Similarly, they have also urged the apex monetary institution to extend the time frame of such investments to up to 10 years from the existing limit of two years.

Revising the threshold of risk weighted loans, annulling the mandatory provision to maintain a capital redemption reserve by banks while issuing bonds and debentures, simplifying the transaction of government bonds and revising the interest rate corridor are in the wish list that the association has submitted to the central bank for the upcoming monetary policy.

 

RAJESH KHANAL

Source: The Kathmandu Post