RBI policy may help Nepal firms get additional financing, local experts reckon

Kathmandu, Oct 6 (IANS) The Reserve Bank of India's (RBI) decision to allow certain Indian banks to lend to residents of Nepal, Bhutan, and Sri Lanka in Indian rupees could offer new financing alternatives for Nepali businesses, some of the country's leading experts believe.

On October 1, the RBI announced that it would allow Authorised Dealer (AD) banks in India and their overseas branches to lend in Indian currency to persons resident in Bhutan, Nepal, and Sri Lanka, including banks in these jurisdictions, to facilitate cross-border trade transactions.

AD banks are those licensed to engage in foreign exchange transactions, such as the State Bank of India, Punjab National Bank, HDFC Bank, ICICI Bank, and the Axis Bank.

India's Central Bank said the move aims to promote the settlement of cross-border transactions in Indian rupees. The RBI has not yet announced the terms and conditions under which the Indian AD banks will be able to lend to residents of these three countries. It stated that the amendments to the regulations will be notified shortly.

According to officials at Nepal's Central Bank, the RBI's decision could facilitate Nepali businesses in obtaining loans from Indian banks, given that the Nepal Rastra Bank (NRB) has already opened the door for Nepali individuals, firms, and banks to receive loans from foreign individuals, firms, and banks.

In 2021, the NRB allowed such borrowing under certain conditions, including an interest rate cap. Currently, the NRB permits Nepali individuals and firms to obtain loans of up to one million US dollars from relatives, other individuals, non-resident Nepalis, or associations and organisations abroad, and up to 100 million Indian rupees in the case of India. However, such loans cannot be invested in housing, real estate, or the share market.

There are, however, very few instances of Nepali businesses borrowing from foreign banks, though Nepali banks themselves have borrowed from foreign institutions to invest in specific sectors.

"It is not immediately clear under what conditions the Indian banks will lend in Nepal," a senior NRB official told IANS. "Nevertheless, Indian banks lending to Nepali residents is a welcome development because it aligns with the policy of Nepal's Central Bank. It may, however, be more challenging for firms that fail to earn sufficient income and struggle to repay the loans," he added.

Former Executive Director of NRB, Nara Bahadur Thapa, said the RBI's decision could help Nepali firms secure loans at competitive interest rates. "Nepali firms will no longer have to rely solely on Nepali banks, and this will also create a challenge for our banks to become more competitive," he said. According to Thapa, Nepali firms could choose to borrow from Indian banks when domestic interest rates rise.

Currently, interest rates in Nepal remain low due to high excess liquidity in the banking system. Banks are offering loans at less than seven per cent for housing and auto loans. "At present, Nepali banks themselves are providing loans at very low interest rates, so Nepali firms may not be interested in borrowing from abroad," said the NRB official. But the Nepali banking system also has a history of facing acute liquidity crunch when interest rates go higher.

However, Nepali banks face limitations in their lending capacity. "The entire banking industry in Nepal does not have the capacity to finance large-scale infrastructure projects, such as 1,000 MW hydropower projects, without breaching the single-customer lending limit," said Keshav Acharya, an economist and former NRB Executive Director.

With Nepal aiming to develop 28,500 MW of electricity in the next 10 years — up from nearly 4,000 MW at present — the country will require US$46.5 billion, according to the Energy Development Roadmap 2025.

"Indian banks have a greater capacity to fund large infrastructure projects, and those developing such projects in Nepal could secure loans from Indian banks," Acharya told IANS.

However, according to the RBI's announcement, loans from Indian banks will only be available in Indian currency. This means a Nepali company seeking to procure goods for a project may have to rely primarily on the Indian market, since the Indian currency is not yet globally accepted.

"This implies that Nepal's prolonged economic dependence on India will deepen further," Acharya said. Nepal-India informal trade is substantial due to the porous border the two countries share. Nepal also remains heavily dependent on India for formal trade, both as an export destination and as a major source of imports.

Nepal's bilateral trade with India accounts for over 60 per cent of its total foreign trade. In the last fiscal year 2024–25, which ended in mid-July, Nepal exported goods worth NPR 224 billion to India, while imports from India reached NPR 1,071 billion. India's share in Nepal’s total international trade during the fiscal year stood at 62.3 per cent, according to the NRB.

Due to the large volume of trade with India, Nepal has long been selling convertible foreign currency — such as the US dollar — to buy Indian currency, enabling Nepali traders to import goods from India. Nepal maintains most of its foreign exchange reserves because of the increased flow of remittances sent home by its expat population.

"One advantage of Indian banks providing loans to Nepali firms is that Nepal might not need to sell US dollars to purchase Indian currency to the extent that we are doing currently, thereby saving the commission paid for such exchanges," Acharya added.

--IANS

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