The central bank has broadened credit sources of microfinance companies.
Issuing a circular on Monday, the central bank has allowed them to take loans in foreign currency from pension funds, hedge funds and other authorised organisations abroad too to ease pressure on shrinking foreign currency reserves.
Earlier, they were permitted to borrow only from foreign banks.
According to the central bank, microfinance companies can borrow up to 25 per cent of their primary capital from foreign financial sectors. “Microfinance companies can lend the money only in specified sectors – including tourism, agriculture, micro enterprise, micro hydro and renewable energy, income generating activities and self-employment and poverty alleviation – that contribute to the country's foreign exchange earnings.
The central bank has revised the provision to bring more foreign currency and improve the liquidity position. The central bank has turned its focus on microfinance companies that operate with little capital and have limited access in the international arena at a time when even the commercial banks are also struggling to get foreign currency loans.
However, most microfinance companies are unlikely to obtain loans in foreign currency as only a few of these companies have a primary capital of more than Rs 1 billion, the amount of money they can bring into the country will also be small.
According to the central bank, the foreign currency reserve has shrunk to $9.50 billion as of mid-July, down from $10.08 billion in the same period of last fiscal year. Though, it’s not a huge fall, the drop in foreign currency reserve is yet another signal for the government to be serious on time.
The central bank has been encouraging commercial banks to get loans from foreign companies to ease the liquidity crunch too. Though, most of the banks are facing the loanable fund crunch, they have not expressed interest to obtain loans in foreign currency, also despite the introduction of a lenient policy last year.
As of now, only two banks have taken loans in foreign currency including NMB Bank – that has taken a Rs16 billion project loan, the largest so far, from the Netherlands Development Finance Company, a Dutch development bank and NIC Asia Bank that has started the process to obtain a loan from International Finance Corporation (IFC), a member of the World Bank Group.
Foreign institutions were reluctant to offer loans to Nepali banks due to the failure to enforce a hedging solution effectively. Under a revised provision, the central bank has increased the maximum interest rate microfinance companies can pay on loans obtained from foreign sources to 6 month Libor (London Interbank Offered Rate) plus 4 per cent.
“The interest rate on such foreign currency borrowing should not exceed 6 month Libor plus 4 per cent that includes all applicable fees,” Nepal Rastra Bank (NRB) directive reads. “Earlier, the maximum interest rate was fixed at 3 per cent.”
The central bank has also told microfinance institutions that their total capital mobilisation should not exceed 30 times their core (tier 1) capital.
Currently, there are 91 microfinance companies in operation in the country.
Issuing a circular on Monday, the central bank has allowed them to take loans in foreign currency from pension funds, hedge funds and other authorised organisations abroad too to ease pressure on shrinking foreign currency reserves.
Earlier, they were permitted to borrow only from foreign banks.
According to the central bank, microfinance companies can borrow up to 25 per cent of their primary capital from foreign financial sectors. “Microfinance companies can lend the money only in specified sectors – including tourism, agriculture, micro enterprise, micro hydro and renewable energy, income generating activities and self-employment and poverty alleviation – that contribute to the country's foreign exchange earnings.
The central bank has revised the provision to bring more foreign currency and improve the liquidity position. The central bank has turned its focus on microfinance companies that operate with little capital and have limited access in the international arena at a time when even the commercial banks are also struggling to get foreign currency loans.
However, most microfinance companies are unlikely to obtain loans in foreign currency as only a few of these companies have a primary capital of more than Rs 1 billion, the amount of money they can bring into the country will also be small.
According to the central bank, the foreign currency reserve has shrunk to $9.50 billion as of mid-July, down from $10.08 billion in the same period of last fiscal year. Though, it’s not a huge fall, the drop in foreign currency reserve is yet another signal for the government to be serious on time.
The central bank has been encouraging commercial banks to get loans from foreign companies to ease the liquidity crunch too. Though, most of the banks are facing the loanable fund crunch, they have not expressed interest to obtain loans in foreign currency, also despite the introduction of a lenient policy last year.
As of now, only two banks have taken loans in foreign currency including NMB Bank – that has taken a Rs16 billion project loan, the largest so far, from the Netherlands Development Finance Company, a Dutch development bank and NIC Asia Bank that has started the process to obtain a loan from International Finance Corporation (IFC), a member of the World Bank Group.
Foreign institutions were reluctant to offer loans to Nepali banks due to the failure to enforce a hedging solution effectively. Under a revised provision, the central bank has increased the maximum interest rate microfinance companies can pay on loans obtained from foreign sources to 6 month Libor (London Interbank Offered Rate) plus 4 per cent.
“The interest rate on such foreign currency borrowing should not exceed 6 month Libor plus 4 per cent that includes all applicable fees,” Nepal Rastra Bank (NRB) directive reads. “Earlier, the maximum interest rate was fixed at 3 per cent.”
The central bank has also told microfinance institutions that their total capital mobilisation should not exceed 30 times their core (tier 1) capital.
Currently, there are 91 microfinance companies in operation in the country.
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