IMF’s suggestion to raise the Lender’s Facility rate Slightly Above the Bank’s Liquidity Facility Rate

Kathmandu. The report of the International Monetary Fund (IMF) has mentioned that Central Bank has made significant improvements in the banking sector by introducing the arrangement of last creditor facility. The IMF has mentioned this in its report on Nepal, ‘Financial Sector Stability Review’.

In this report, which was prepared based on the data of last June, the IMF said that this improvement is important, but more work is needed.

“The central bank should provide such an emergency liquidity facility only to organizations that have the ability to repay their loans,” the report states, “therefore, the process of providing such facilities should be adopted based on the basis of whether or not the institution’s ability to repay loans is reliable, the ability to pay, and the capital assessment process. It should also be clarified in the bank act and regulations.’

The IMF has also suggested that the officials of the National Bank, who have the authority to decide on grant/not grant such final facilities, should be kept separate from the responsibility of studying the matter of grant such facilities.It has also been suggested that the rate of last creditor facility should be slightly higher than the rate of various liquidity facilities provided by the National Bank to banks. The IMF is also of the opinion that such facilities should not be given to organizations that cannot be reformed as they are now.

Banks whose problems are not solved by the current liquidity facilities provided by the National Bank have arranged to get such facilities for 6 months. Various criteria have been prescribed to get such a facility. Among these, it is mentioned that it will be provided if the organization is unable to fulfill its obligations and if such an organization is taken into liquidation, it may create a challenge in the economy and financial system.The last lender facility was implemented from the last financial year. Bankers protested that the provision of Lender of Last resort would signal that the banking sector was in trouble.