BFIs told to create contingency plans

Kathmandu November  16- Nepal Rastra Bank (NRB) has told banks and financial institutions (BFIs) to prepare a contingency management framework against natural disasters and other major incidents that could have an impact on the country’s financial system.

The central bank’s directive follows the heavy toll on economic activities resulting from a recent earthquake, ongoing banda organised by Madhes-based parties and India’s unofficial blockade which will surely have impacts on the banking sector.

 According to the central bank, the earthquake has posed a risk to loans of Rs38 billion extended by BFIs to various businesses. NRB officials said that the impact of the current blockade and banda was far higher than the effect of the earthquake as the country’s industrial belt, the Tarai, has been in the grip of a banda while trading activities have slowed because imports have stopped due to the blockade.

The central bank, which has been studying the impact of the banda and embargo, has not come up with a figure of the real losses to the economy and the effect on the banking sector. NRB spokesperson Trilochan Pangeni said that the directive was issued against a backdrop of the earthquake and the Indian embargo. “We had not anticipated that the banda would last so long and that the country would suffer an blockade,” he added. “These incidents have shown the need for a contingency plan on the part of BFIs because their business relies on the performance of business enterprises.”

Meanwhile, the central bank has extended the loan repayment deadline for borrowers by one year and relaxed loan loss provisioning levels for banks considering the difficult situation created by the long-running banda and undeclared Indian blockade. The central bank has also allowed BFIs to increase the grace period for starting loan repayments for various business and development projects by one year. It has also pushed back the repayment deadline for trust receipt loans provided to importers.

Likewise, the central bank also told BFIs to convert loans of over Rs500 million extended under multiple banking to consortium loans by mid-July 2016. “The move was taken to ensure risk sharing among the banks,” said Pangeni. Under multiple banking, the bank first providing a loan against the same collateral would have the first right in case of a default. Source: TKP