Nepal Rastra Bank urged to allow to keep interest earning accounts - Banking

Nepal Rastra Bank urged to allow to keep interest earning accounts

KATHMANDU – Commercial banks and Finance companies in Nepal have urged Nepal Rastra Bank (NRB) to allow all of them to maintain interest-earning accounts in other banks and financial institutions (BFIs). The finance companies issued the appeal after the central bank gave its clearance selectively.

In mid-December 2011, NRB extended the deadline for development banks and finance companies outside the Kathmandu valley to close their interest-earning accounts in commercial banks to mid-July from mid-January 2012.

“We have a majority of interest-earning deposits among peer finance companies under inter-bank deposits, and we felt it necessary to ask the central bank for an extension of the deadline,” said Rajendra Man Shakya, president of the Finance Companies Association.

NRB introduced the provision in a bid to maintain financial discipline saying that such deposit accounts created anomalies in the system. According to central bank officials, there had been instances of loans being issued to promoters by their companies which were against banking norms. BFIs have also been using such deposits to manage their credit deposit ratio which created anomalies in the system, according to NRB.

Central bank officials said the measure had been introduced to stop the practice of depositing money in other institutions and taking loans.

However, finance companies that are struggling to salvage their credibility after a number of them sank have been seriously affected by the provision as the institutional deposits held by them would be withdrawn and their liquidity position strained.

If the central bank does not consider their request, development banks and finance companies having their central offices in the Kathmandu valley will have to withdraw such deposits by mid-January. However, Shakya said that they are hopeful that NRB would consider their request as talks have gone well with it. “We are in the process of doing a review regarding this,” said a senior NRB official.