NRB changes credit policy

In a crucial decision to check rapid expansion of credit flow, the board meeting of Nepal Rastra Bank (NRB) Tuesday changed the long-running credit policy that will increase borrowing rates. A high-ranking NRB official also vowed to take further steps if current credit bubble doesn´t cool down even after the adoption of news measures. As per the decision, the central bank will now follow a new methodology to calculate Standby Credit Facility (SLF) -- a loan extended to financial institutions by the central bank against the government bills owned by them. "The NRB is convinced that there exists a credit bubble in the economy and the main purpose of the new policy change is to contain rapid credit expansion which has fueled imports thereby widening trade deficit to an alarming level," said the official.

The imports increased by 30 percent against the decline of 16.8 percent in exports during the first quarter of the current fiscal year, resulting to increase in trade deficit by 48.6 percent. Earlier, the SLF rate used to be calculated by adding 3 percent panel rate either on latest average Treasury Bills (TBs) discount rate or repo rate -- the rate fixed at NRB called bidding for loans from central bank against collateral of government bills, whichever is high. However, as per the new methodology, the central bank will add 3 percent panel rate either on latest average treasury discount rate or repo or bank rate interest fixed by central bank for loans it extends to financial institutions, whichever is high.

Recent studies have showed that the huge amount of loans that banks took under the SLF facility was the main factor responsible for the unnatural rise in consumption expenditure that resulted in the shocking rise of imports, said the official. "When the average rate of the TBs and repo rate were around 4 percent, financial institutions took heavy loans from the central bank at the rate of 7 percent and extended the loans to borrowers at over 12 percent," the official said, adding that banks were found attracted towards such transactions as they used to produce handsome and easy profits.

But, as per the new policy, the SLF rate will be 9.5 percent at minimum, given the fact that the central bank has maintained bank rate at 6.5 percent for the current fiscal year. "The central bank will see whether the new policy will be able to curb the current credit rate growth and if it doesn´t, the NRB will take further steps that might even include increasing the bank rate itself," the official said.

The SLF amount during the first three months of the current fiscal year has squeezed to just Rs 4.5 billion as the repo rate has gone up to over 9 percent due to ´short-term´ crunch of liquidity. The SLF loan extension to financial institutions went up to Rs 107.82 billion by the end of last fiscal year and the amount was 130 percent higher than the figure recorded in fiscal year 2006/07.
Source:Republica