December 21:  Nepal Rastra Bank (NRB) has made it mandatory to keep cash margin when opening letter of credit (LC) for importing luxury goods. Such measure was introduced to control the declining foreign exchange reserves. 

NRB issued a directive for its own banking department, provincial offices, commercial banks and national level banks on December 20 and introduced the new provision. When banks open LC for the purpose of importing the goods, they need to take into consideration cash margin from the importer.

NRB has implemented such provisions for the import of goods with various harmonic codes. When importing goods with harmonic codes 0907, 17, 22, 24, 3303, 3304, 3305, 44, 64, 65, 66, 67, 68, 69, 7010, 7106, 8703, 8711, 9403 and 9504.40.00 margin of fifty percent to cent percent should be available. Likewise, while importing items with codes from 8703 to 8711, fifty percent margin should be available.

NRB has directed to keep a hundred percent cash margin on other items. NRB has introduced such provisions for the import of silver, motorcycles, vehicles, sugar, metal furniture, water, lead products, make-up and other items.

According to NRB interest can't be paid on such margin. Also, it has instructed that loans cannot be disbursed for the purpose of keeping margin amount. Banks are required to take margin amount at the time of opening the LC and the amount can be used to pay for imports.

This provision will not apply on imports of medical products. Similarly, this provision will not be applicable to the items imported by the government authorities, diplomatic missions and hospitals.

NRB has made the new provision in view of the declining foreign exchange reserves. Lately, foreign exchange reserves have been steadily declining particularly through imports. As a result, the balance of payments has also incurred a loss of Rs 150 billion.

Gunakar Bhatt, Spokesperson of NRB said the flow of foreign currencies is increasing with the increase in imports. This is having impact on foreign exchange reserves and the balance of payments. The recent decision has been taken to control imports. According to the central bank, this provision will be removed once the situation normalizes. 

Some banks are already taking margins when opening LCs for import of various commodities. The central bank has introduced the provision in paper as a short term solution.