Allow banks to open branches abroad: NBA

AS THE Nepal Rastra Bank (NRB) prepares the new monetary policy, the Nepal Bankers’ Association (NBA) has asked the NRB to allow banks to open branches in foreign countries as subsidiary or in joint venture with local banks. The central bank has already allowed commercial banks to open liaison/representative offices abroad. In January 2013, the NRB had fixed the criteria for banks to open such offices abroad. NBA Vice-president Upendra Poudel said allowing banks to open branches abroad would provide them additional business opportunities. “However, it will be difficult to open joint-venture firm abroad due to the existing legal provision that bars investing abroad,” he said. In its suggestions to the NRB forwarded last week, the NBA has demanded that the NRB maintain the ratio of deprived sector lending at 3.5 percent, arguing over supply of funds compared to demand has resulted in higher nonperforming assets level in micro-finance institutions (MFIs). Banks usually don’t directly lend to the deprived sector, but they give wholesale loans to MFIs, and the MFIs later invest in the sector. “Fund supply should be demanddriven,” said Poudel. “Higher supply has resulted in the funds being deposited back in commercial banks.” The central bank has adopted a policy of increasing the proportion of loans to the deprived sector every year by 0.5 percentage point to 5 percent in three years. The bankers have demanded that the central bank increase the ceiling on credit-to-deposit plus core capital ratio to 85 percent from the existing 80 percent. “We seek NRB flexibility on credit-to-deposit ratio, while maintaining the net liquidity ratio at 20 percent,” Poudel said. Given the banking sector facing liquidity-related problems, the NBA has asked the central bank to intervene in such satiations through repo and reverse repo on a daily basis. The NRB has been using these monetary instruments occasionally only when market fails to correct liquidity situation itself. It injects liquidity in the market through repo and absorbs surplus liquidity in the market through reverse repo. The NBA has also sought a provision that enables private sector banks to do government transactions. Only government- owned banks and a few private sector banks are allowed to do government transactions. As far as foreign exchange market is concerned, the bankers have sought daily NRB intervention in the foreign exchange market. They have asked that the banks be allowed to purchase Indian currency (IC) directly from Indian private sector banks. Currently, banks have to purchase Indian currency through the central bank which the bankers say delays the process of receiving the IC. “Sometimes we struggle to settle clients’ transactions for the delay in getting IC,” said Poudel. Other demands of the bankers include the banks be allowed to swap their surplus Nepali currency into IC and the exchanged IC be allowed to invest in Indian government securities. “Despite having surplus funds, we have been failing to benefit due to low yield on government securities,” said Poudel. “Also, there is no guarantee when the government issues its debt instruments.” The bankers have also asked the central bank to encourage foreign contractors participating in global tender in Nepal to keep their foreign exchange in domestic banks. NBA demands • Allowing banks to open branches in foreign countries as subsidiary or in joint venture with local banks • Not increasing the ratio of deprived sector lending • Increasing Credit-todeposit plus core capital ratio • Issuing repo and reverse repo on a daily basis • Allowing banks to purchase IC directly from Indian banks • Allowing Nepali banks to invest in Indian government securities • Involving private sector banks in government transactions • Intervening in foreign exchange market daily