THE Nepal Rastra Bank (NRB) has directed banks against engaging in hedging of the US dollar through non-deliverable forward (NDF) contracts with international banks. The NRB invited bankers to the central bank, requesting that they cease the NDF contract temporarily. The NDF is a hedging system under which international banks hedge the exchange rate of the US dollar in Nepali banks, potentially saving Nepali banks from losses due to exchange rate volatility. As the hedged dollar is not delivered physically and only deducted from the account of Nepali banks, it is called a ‘non-deliverable forward contract’. Due to the instability of the exchange rate in recent days, banks have taken NDF contracts as safeguards against exchange rate risks. While hedging, the dollar’s exchange rate is maintained against the Indian currency, with which the Nepali currency (NC) is pegged. Bankers said as the Nepali currency is not acceptable globally; they are taking reference of the dollar’s exchange rate with the IC. While hedging under the NDF, the international banks give certain exchange rates of the US dollar to Nepali banks. If the exchange rate changes in the market on the expiry date of hedging, the Nepali and international banks settle the difference by paying the variance amount to the establishment in deficit. For example, if the market exchange rate is IRs 65 per US dollar, international banks may offer IRs 65.20 per US dollar for hedging purposes, which is beneficial for the Nepali banks. On the day of settlement, if the exchange rate reaches IRs 65.80 per US dollar, then the foreign bank has to pay the Nepali bank the amount of difference (60 paisa) in the US dollar equivalency. If the rate is lower (eg IRs 64.90), Nepali banks have to pay (30 paisa) to the international bank that hedges. “Usually, we take the exchange rate set by the Reserve Bank of India (RBI) on the settlement day to settle the difference between the hedged rate and the market rate,” said an official of a leading commercial bank. Bankers said it is a necessary instrument for them as the government intervenes only three times a week. An NRB official said they have taken measures to study whether the NDF has been beneficial during current inconsistencies in the exchange rate. As the dollar’s exchange rate is fixed against IC for hedging, the NRB has been sensitive. The RBI has banned banks from engaging in NDF contracts in India. However, bankers said as the money is not delivered and the settlement is also made in US dollars, banning the NDF contract is not logical. Gyanendra Sharestha, chief of treasury department at the Himalayan Bank Limited (HBL) said that hedging opportunities could help banks to be bold on offering a good exchange rate to customers. “We can be confident in offering better exchange rates to migrant workers if there are hedging opportunities,” he said. “Otherwise, they go for hundi (an informal channel), and if we fail to offer a better exchange rate than hundi operators it is not good for the economy.” He said that daily intervention from the central bank could be beneficial, if not a complete solution, in times of market volatility. The Foreign Exchange Dealers’ Association of Nepal (FEDAN) has already asked the central bank not to ban the NDF. “We requested the NRB to allow us to continue NDF deals, as it is not harmful,” said Bijaya Bahadur Shrestha, president of FEDAN. According to bankers, US dollars worth Rs 15 billion have been hedged under the NDF currently. Usually, Nepali banks engage in NDF deals for an average period of two days to one week.
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