NRB bid to bail out crisis-hit BFIs
As a last-resort lender, Nepal Rastra Bank (NRB) has prepared a guideline to lend banks and financial institutions (BFIs) facing severe crisis for one year.The banking sector has been facing a severe liquidity crunch over the last one-and-a-half years and deposits are not coming to BFIs. Therefore, NRB is opening the loan door to them under these circumstances.
Provision 49 of the Nepal Rastra Bank (NRB) Act allows the central bank to work as a last-resort lender in extraordinary situations. This provision allows it to provide any sort of credit to a BFI for a year in case the government, for the sake of public interest and welfare, deems it appropriate to provide loan and requests the central bank for this. The government should give a guarantee of securities at the prevailing market rate for such a loan.
However, NRB has simplified the provision regarding lending under this provision enabling BFIs themselves to request the central bank to lend. “Then, the NRB will loan them against the documents on collateral of good loans of the concerned BFI,” said a senior NRB official.
Although the Act has provisioned that the government can bank on its securities for lending to particular BFIs, NRB said that the government giving a guarantee for the private bank is rare. “That’s why, we allowed even private banks to get financing from the central bank as a last resort lender,” said an NRB official. The central bank will provide loans on interest at bank rate. Currently, the bank rate is 7 percent. The central bank has so far used this window just once—when Nepal Bangladesh Bank faced a severe crisis, inviting a central bank takeover five years ago. The central bank injected more than Rs 1 billion into Nepal Bangladesh Bank after huge deposits were withdrawn from that bank. The central bank has, however, been providing refinancing to the BFIs for a maximum period of six months. Under Provision 49 (1) of the NRB Act, the central bank can provide refinancing to BFIs against securities such as debt bonds issued by the government, deposits accumulated in the central bank or gold and precious metals, which the NRB may transact under this Act among others.
Source:ekantipur
Provision 49 of the Nepal Rastra Bank (NRB) Act allows the central bank to work as a last-resort lender in extraordinary situations. This provision allows it to provide any sort of credit to a BFI for a year in case the government, for the sake of public interest and welfare, deems it appropriate to provide loan and requests the central bank for this. The government should give a guarantee of securities at the prevailing market rate for such a loan.
However, NRB has simplified the provision regarding lending under this provision enabling BFIs themselves to request the central bank to lend. “Then, the NRB will loan them against the documents on collateral of good loans of the concerned BFI,” said a senior NRB official.
Although the Act has provisioned that the government can bank on its securities for lending to particular BFIs, NRB said that the government giving a guarantee for the private bank is rare. “That’s why, we allowed even private banks to get financing from the central bank as a last resort lender,” said an NRB official. The central bank will provide loans on interest at bank rate. Currently, the bank rate is 7 percent. The central bank has so far used this window just once—when Nepal Bangladesh Bank faced a severe crisis, inviting a central bank takeover five years ago. The central bank injected more than Rs 1 billion into Nepal Bangladesh Bank after huge deposits were withdrawn from that bank. The central bank has, however, been providing refinancing to the BFIs for a maximum period of six months. Under Provision 49 (1) of the NRB Act, the central bank can provide refinancing to BFIs against securities such as debt bonds issued by the government, deposits accumulated in the central bank or gold and precious metals, which the NRB may transact under this Act among others.
Source:ekantipur
