September 25: Nepal Rastra Bank (NRB) has proposed one year period for the payment of the lender of last resort facility, a financial tool used by banks and financial institutions in cases of an extreme shortage of liquidity. The central bank has prepared a draft of the Lender of Last Resort Facility Bylaws-2079 with a proposal to specify the payment period and to increase the sectoral scope in which it can be used.

According to the Credit Policy 2067, the payment period of the lender of last resort facility has not been fixed so far. NRB has informed that it is going to issue bylaws to manage such facility.

A lender of last resort facility is a financial instrument used by banks and financial institutions in case of extreme liquidity crisis when they are unable to return the deposits of the general public. Until now, only Vibor Bikas Bank has used it.

Similarly, the proposed bylaws mention that the interest rate for the lender of last resort facility will be as specified by Nepal Rastra Bank. Currently, there is a provision that the interest rate of this facility will be equal to the bank rate.

The draft of the bylaws has also increased the scope of the lender of last resort facility.

Banks can avail this facility on condition that they are not able to manage the required liquidity through the interbank market, daily liquidity facility, open market transactions and standing liquidity facility. Banks can also use this facility if they are unable manage liquidity or to meet their immediate obligations due to lack of marketable assets, and if they are unable to meet their immediate obligations after returning large amount of deposits and are unable to disbursed loans as per their commitment.

Similarly, the draft proposes providing this facility to banks if the economy and financial system faces challenges due to systemic risk posed by a single bank, or if there is a decline in trust of the general public towards the banking system, or if a bank is unable to pay immediate obligations due to natural disasters, and if it is unable to fulfil its immediate obligations due to national and international crisis and the bank is liquidated.

The board of directors of the problematic bank must file an application with the NRB with reasons for seeking the lender of last resort facility and the required amount and payment plan to avail such facility. Along with the application, a 6-month cash flow projection, statement of assets and liabilities of different periods, statement of deposits and other short-term liabilities, and an action plan for revival should also be submitted.