As Nepal's banking system has been struggling to provide loans due to the liquidity crunch, the central bank of the Himalayan nation has taken measures to ensure banks would have more funds available to lend.
As per the current provision of Nepal Rastra Bank (NRB), the central bank of the country, the banks have to maintain credit to core capital plus deposit (CCD) ratio at 80 percent.
With majority of the banks have maintained CCD ratio close to 80 percent or more, they cannot lend the remaining 20 percent of fund creating credit crunch in the market.
This has increased interest rates for both credit and deposit which hit the economic activities.
But during the Mid-Term Review of the monetary policy for the current fiscal year 2016-17 on Tuesday, the NRB adopted some flexibility in this provision.
The NRB made provision that the loans to be provided to deprived sector (meant for poor people), agriculture loans for the youths and 50 percent of loans to be provided to agriculture and other productive sector could be deducted from the credit portion for counting CCD ratio.
"This will bring out around 1.21 billion U.S. dollar in the market," said Anil Shah, president of Nepal Bankers' Association, a grouping of commercial banks. "This will give some breathing space for banks to provide loans."
The Nepalese central bank also introduced the policy to discourage credit to automobile sector through the review of the monetary policy. "Now onwards, banks can lend maximum up to 50 percent of the value of vehicle," the central bank said.
Earlier, there was not such restriction in lending to vehicle purchases. According to bankers, banks have been providing up to 90 percent of the value of vehicles.
Although there is a little risk in lending in automobile sector, the central bank said that the policy was taken to discourage lending to unproductive sector. The NRB considers auto sector unproductive.
"As there is limited resource available for credit, we want that amount should go to the productive sector," said Narayan Pooudel, spokesperson of NRB.
But, automobile traders say that the central bank's policy would severely hit the business of the automobile sector which has been one of the largest contributors of revenue for the government.
Anjan Shrestha, president of Nepal Automobile Dealers' Association, said that categorizing automobile as unproductive sector is misguided because vehicles give mobility and help enhancing productivity of individuals.
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