FIs allowed to maintain interest fetching account for a year
KATHMANDU, July 24: Nepal Rastra Bank (NRB) has allowed financial institutions (FIs), including development banks and finance companies, to maintain interest earning account for one more year.
“They can continue maintaining the interest fetching call account till the end of this fiscal year,” said NRB Spokesperson Bhaskar Mani Gyawali.
However, he said the extension has been provided for the last time. “By mid-July 2013, they will need to close all such accounts,” he told Republica.
The central bank last year had barred FIs from depositing their money in other banks and financial institutions (BFIs) for the purpose of earning interest income. Though it allowed them to maintain call account, it had asked them to close such accounts as well from mid-July 2012.
But it has relaxed its earlier directive when it issued the Unified Directives at the end of the last fiscal year.
“We welcome the extension. It has salvaged us for the time being,” said Rajendra Man Shakya, president of Nepal Finance Companies Association.
Under the call account, FIs are currently earning interest in a range of 2 to 5 percent per annum.
The NRB had decided to restrict the FIs from holding the interest fetching accounts at other BFIs mainly after it assessed such accounts were creating anomalies in the financial system. The central bank reckoned that promoters were largely using such accounts to acquire loans indirectly from other institution and BFIs were manipulating them to manage their credit-deposit ratio.
“Most importantly, maintaining such account has encouraged the FIs to refrain from core banking activities, such as lending to viable projects,” Gyawali had told Republica, while explaining why the NRB took such a decision.
However, finance companies that were facing severe liquidity crunch and also erosion of their trustworthiness had been consistently requesting the central bank to relax the provision.
The relaxation was much needed, said another CEO of finance company, referring that finance companies over the 2011/12 witnessed decline in their deposits. Data of NRB shows deposits of finance companies over a span of year till mid-May 2012 had declined to Rs 78.91 billion from Rs 85.64 billion.