KATHMANDU,  July 29: Nepal Rastra Bank (NRB) has announced to take the responsibility for the risk caused by exchange rate fluctuation when banks and financial institutions take loans in foreign currencies other than Indian currency. On Sunday, NRB issued the Swap Transaction Regulation-2081, which has a provision that foreign currency loans can be bought and sold at a fixed rate.

According to the regulation, "buying and selling US dollar/Nepali rupee" can be done between the banks that bring loans in foreign currency and NRB. In the first phase of such transactions, NRB will buy US dollars and sell Nepali rupees at a specified rate from the lending bank. In the second phase, NRB will sell US dollars to the bank and buy Nepali rupees at the specified date and exchange rate.

Tulsi Prasad Ghimire, Executive Director of the Foreign Exchange Department of NRB, informed that according to the regulations, NRB can now buy foreign currency at a fixed rate and sell foreign currency at a fixed rate when repaying the banks' loans. This arrangement means banks do not have to bear the risk of exchange rate changes when taking loans in foreign currency.

NRB had arranged for banks to bring in foreign currency loans eight years ago. However, banks have not shown interest due to the risk of exchange rate fluctuations. Therefore, NRB issued the swap transaction regulation to reduce and manage the foreign exchange rate risk in loans borrowed by banks and financial institutions from abroad. The regulation specifies the US dollar amount to be bought and sold, the exchange rate, the clearing date of the first phase of the transaction, as well as the exchange rate and clearing date in the swap transaction.

Licensed commercial banks, development banks, finance companies, microfinance institutions, and infrastructure development banks licensed to finance loans in foreign currencies other than the Indian rupee are eligible to carry out swap transactions. Banks can apply for a minimum amount of USD 1 million and a maximum of USD 10 million.

The regulations also established a swap transaction committee under the chairmanship of the deputy governor in charge of the foreign exchange management department of NRB. The executive directors of the foreign exchange management, monetary management, economic research, banking, and finance management departments of NRB will be members of the committee, with the director of the foreign exchange management department serving as the member-secretary.

For the first time in March 2018, NRB allowed commercial banks to borrow up to 25 percent of primary capital from abroad. By making the provision more flexible, NRB has recently allowed commercial banks, development banks, finance companies, and microfinance institutions to take loans. Banks can also take loans in Indian currency.

Currently, banks can borrow up to 100 percent of their primary capital from foreign banks. These loans can be invested in renewable energy generation and transmission lines, road infrastructure, airports, cable cars, bridges, tourism, agriculture, small and medium industries, manufacturing sectors, and the microfinance sector. Banks can take loans from foreign banks as well as approved pension funds, hedge funds, etc. Loans taken from abroad should be determined by adding 4 percent to the 6-month interbank rate. There is a provision that no mortgage guarantee or bank guarantee can be given for this loan, which ranges from 1 to 5 years.