KATHMANDU, June 27: The Deposit and Credit Guarantee Corporation (DCGC), the state-owned deposit and credit insurance company, has demanded Rs 1.5 billion from the government to increase its capital base and create a fund to enhance its risk absorbing capacity.
Of the amount, the corporation wants to spend Rs 1 billion to boost its capital. The corporation has insured deposits of up to Rs 200,000 of all banks and financial institutions in the country.
"The remaining sum will be used to create a fund, which will be used to introduce a range of credit insurance schemes," said Rajan Khanal, chairman of DCGC and joint secretary at the Ministry of Finance.
Under its credit insurance scheme, the corporation is currently insuring livestock. It is also mulling providing cover for loans extended to the agricultural sector to cash in on the central bank-directed lending approach.
Earlier this year, Nepal Rastra Bank asked all banks and financial institutions to extend at least 10 percent of their total loans to agricultural and energy sectors in a bid to increase lending in the productive sector.
Many financial institutions are not worried about extending credit to the energy sector as most of the loans are fully secure. However, they are anxious about exposing themselves to the agricultural sector as they fear such credit may turn into bad debt.
This tendency shown by banks and financial institutions has forced many to conclude that the credit to the agricultural sector will not grow significantly until there is insurance backup.
"If the government wants to assure lenders that their loans will be safe even if channeled to the agricultural sector, then DCGC support will be necessary as it is the only state-owned deposit and loan insurance company," Khanal said. "That´s why the need to set up a fund."
Earlier, the government had officially requested the World Bank for a soft loan of Rs 5 billion for similar purpose. Although the Bank had shown willingness to extend its support, the issue has yet to be finalized.
Lately, the government has also shown interest in strengthening the financial position of the DCGC as it has insured over Rs 70 billion of public deposit.
In this regard, the government, last year, pledged that it would release Rs 400 million every year till 2015 so as to raise DCGC´s capital to Rs 2 billion. But the government last year released only Rs 250 million citing budgetary constraints and another Rs 500 million this year to compensate for last year´s shortfall. This has raised the paid up capital of the corporation to Rs 980 million.
"We are now asking the government to provide us Rs 1 billion of the pledged amount in advance so that our capital reaches close to Rs 2 billion," said another official at DCGC.