Non-Essential Imports Prohibited to Ease Liquidity Crunch, Banks to Constrict Credit Flow

Nepal Rastra Bank has strongly instructed commercial banks not to open letters of credit (LC) for the purpose of importing non-essential items.

The central bank gave such strict instructions in an emergency meeting held with the CEOs of 27 commercial banks.

The central bank gave strict instructions as a brute force way to combat the deficit in the balance of payments. The balance of payments of a country, also known as the balance of international payments, is the difference between all money flowing into the country in a particular period of time and the outflow of money to the rest of the world.

The letter of credit, or "credit letter," is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time. LCs are integral to establishing trust among cross-border traders, and they ensure an international transaction happens.

The central bank has also instructed commercial banks to maintain their CD ratio. The CD ratio refers to the credit-deposit ratio of a bank. The higher the CD ratio, the higher the received deposits in banks have been forwarded as loans, hence the lower is the available liquidity. Commercial banks have also been instructed to slow down lending and eventually bring it to a halt until the liquidity scenario improves.