BUSINESS ADMINISTRATION AND MANAGEMENT STUDIES: FOREIGN EXCHANGE POLICY, REGULATION, RESERVE AND GOVERMENTAL RELATIONSHIPS OF NEPAL RASTRA BANK (NRB)

Foreign Exchange Policy, Regulation and Reserve

In order to enhance the knowledge about the foreign exchange policy, regulations and reserve related issues of Nepal Rastra Bank, I have written this separate blog.

Being a central bank of Nepal, the 'Bankers Bank' has lots of roles and responsibilities. As it is said a big power comes with a big responsibility. So, is the case with Nepal Rastra Bank. For more details regarding Nepal Rastra Bank please click the following link :

https://managementknowledges.blogspot.com/2016/12/nepal-rastra-bank-and-its-restricted.html

https://managementknowledges.blogspot.com/2016/12/objectives-function-duties-and-power-of.html

The overall issues regarding foreign exchange policy, regulation, reserve and the governmental relations of Nepal Rastra Bank are as follows:

Foreign Exchange Policy:

The Nepal Rastra Bank has the full authority to formulate and implement any foreign exchange policy of Nepal.

Management of Foreign Exchange:

The central bank manages the foreign exchange. Nepal Rastra Bank has the following powers to manage the foreign exchange: -

To issue license to the persons willing to deal in foreign exchange transaction.
To frame rules and bylaws, orders, directives and circulars in order to regulate dealings in the foreign exchange transaction done by the foreign exchange dealer.
To inspect, supervise and monitor the foreign exchange dealer.
To set the bases, limitations, terms and conditions for the transaction of the foreign exchange dealer.
To provide sound system for the foreign exchange rates of the Nepalese currency.

Particulars of Foreign Exchanges Dealings:

Nepal Rastra Bank compels the license-holder to submit the detailed particulars regarding exchange of foreign currency and the transaction relating to it. However, the time duration for submitting such particulars, the format and other documents relating to it are prescribed as and whenever the bank deems fit. Therefore, it is the duty of the concerned license holder to submit the particulars and the documents whenever demanded.

Dealing in Foreign Exchanges:

The Bank may purchase and sell foreign exchanges, gold and precious metals. The purchase and sale to be made by the Bank can be through:

Spot
Advance exchange rate
Swap
Options

- the similar types of other instruments, cash or negotiable instrument.

The Bank deals in foreign exchange after fixing its buying and selling rates. The basis, limitations and conditions of such dealing are prescribed by the Bank.

Foreign Exchange Reserve:

The Bank mobilizes the foreign exchanges reserve. Such reserve are denominated in the respective foreign exchange and such reserve consists of the following assets:-

Gold and other precious metals held by the Bank.

Foreign currencies held by the Bank.

Foreign currencies held in the accounts of the Bank on the books of a foreign central bank or other foreign banks.

Special drawing rights (SDR) held by the Bank at the International Monetary Fund.

Bill of exchange, promissory note, certificate of deposit, bonds, and other debt instrument payable in convertible foreign currencies issued by any debtor or liability holder and held by the Bank.

Any forward purchase or repurchase agreements of the Bank made with or guaranteed by foreign central banks or public international financial institutions, and

Any futures and option contracts of the Bank providing for payment in freely convertible foreign currency.

While selecting the assets due consideration is given to the Bank's capital and liquidity . This is done to maximize earnings. The Bank maintains international reserve at a level, which is sufficient for:

Execution of monitory and exchange rate policies.
Prompt settlement of the international transaction.

If the international reserves is :

Declined or
In a situation of facing danger of declining

- to such an extent that the execution of the monetary or exchange rate policies in the prompt settlement of the country's international transactions is hampered then, the Bank submits a report to Government of Nepal on following matters :

The international reserves position .
The main causes which have led or may lead to such a decline.
Recommendations to overcome the situations.

Therefore, until the situation is favorable, the Bank keeps reporting and recommending the Government of Nepal. Till then the Bank holds the foreign exchange reserve in its balance sheet.

Issuance of Debt Bond Against Gold and Foreign Currency:

The central bank may issue one or more types of debt bond which is denominated in gold or foreign currency. This is done for certain purpose after taking prior approval from Government of Nepal. The types, duration, payment of principal and interest and other matters of the debt bond to be issue is as prescribed by the Bank.

International Clearing and Payment Agreements:

The central Bank has the power to enters into clearing and payment agreements with public or private central clearing unions domiciled abroad. The Bank may enter into other necessary agreements as it thinks fit. But, this is done only after taking prior approval of the government.

NEPAL RASTRA BANK AND ITS GOVERNMENTAL RELATIONSHIPS

The overall governmental relationships of Nepal Rastra bank with government of Nepal are explained as follows :

Banker, Advisor and Financial Agent:

The Nepal Rastra Bank is the banker and financial advisor of Government of Nepal. This bank act as a financial agent of the Kingdom of Nepal. Government of Nepal shall consults the Bank on any matters that are within the its jurisdiction. Government of Nepal consults the bank while preparing annual budget plan for the country and on the matters related to domestic debt and overdrafts. The Bank submits a pre-budget review report to Government of Nepal each year on the economic and financial matters.

Opinions and Information Relating to External Debt:

Government of Nepal consults Nepal Rastra Bank while taking loan from external sectors. The consultation includes the subjects matter on:

Amount of loan
Terms and conditions of the loan and
The repayment of loan.

Government of Nepal also informs the Bank about following matters :

when any kind of external loans have been received.
while granting approval to private and public institutions to raise loan-creating liability in foreign exchange.

Government of Nepal, public institution or private sector also gets informed by the Nepal Rastra Bank about the agreements that have been made while creation of liability in foreign exchange.

Deposit Collection:

The Nepal Rastra Bank accepts the deposits of Government of Nepal or other bodies as prescribed by Government of Nepal. While accepting deposits, the Bank :

Receives and disburse monies,

Keeps accounts therein,

Provides banking services related thereto.

The central bank even authorizes commercial banks and other financial institutions to conduct the transaction by mentioning the terms and conditions .

Functions of Fiscal Agent:

The central bank acts as a fiscal agent of Government of Nepal. The tasks are done within the agreed terms and conditions on the following matters :-

Marketing, purchasing and selling of debt bonds issued by Government of Nepal and to act as registrar and transfer agent.
Payment of the principal, interest and other fees of the government debt bonds.
Any other necessary functions are carried out as the agent as specified.

Bank may ask for Particulars, Statistics and Documents:

Nepal Rastra Bank can asks for any :

Particulars
Statistics
Documents

- necessary for conduct of its business from the concerned bodies. It becomes the duty of the concerned bodies to provide the particulars, statistics and documents whenever asked .

Consultation on the Matter of Law Reform:

The Nepal Rastra Bank is consulted on any proposals by the concerned entities for legislation with respect to any matters that relates to Bank. objectives or that otherwise are within its fields of competence, including monetary policy and its operations, credit, the balance of payments, foreign exchange, and banking, before they are submitted for amendment or legislative action. The Bank has powers to submit proposals to Government of Nepal for enacting new law or amending the existing laws on the subjects relating to the objectives of the Bank or area of its competence such as monetary policies and its operation, credit, balance of payment, foreign exchange and banking.

Credit to Government of Nepal and Purchase of Government Debt Bonds:

The Bank is not authorized to provide any type of financial assistance to the Government of Nepal or an institution under the full or substantial or partial ownership of Government of Nepal. However, the Bank may extend the credit facility to the Government of Nepal with a condition to repay within 180 days.

The Bank can extend a special credit of long term loan to the Government of Nepal only on account of subscription and similar payments resulting from the membership of the Nepal with international organization.

The Nepal Rastra Bank disburses credit extension to Government of Nepal or an institution under full or substantial or partial ownership of Government of Nepal only in - Nepalese rupees.

Such credit shall be certified by negotiable debt bond issued by Government of Nepal and delivered to the Bank.

Such debt security should have the maturity corresponding to the maturity of the extension of credit and should bear the interest at market rate.

There must be a written agreement executed between Government of Nepal and the Bank. Such agreement should clearly stipulate the principal amount of the loan, limit on a line of credit, the maturity, applicable rates of interest and other charges.

Here, " Negotiable Debt Bond" means the debt bond issued in the form of promissory note.

NOTE:

It is to be noted that, the amount of overdraft provided by the Bank to Government of Nepal will not be :

more than 5% of the revenue income of Government of Nepal

- in the proceeding fiscal year at any point of time.

However, while computing such revenue income, following should not be included :

The amount of borrowing,
Grants or
Any other form of financial assistance or
Income received from the sale of property

Government of Nepal must make the payment of the overdraft within one hundred eighty days at the prevailing interest rate either in the form of cash or marketable debt bond.

The total amount of debt bond purchased by the Bank from Government of Nepal and taken into its ownership will not be :

more than 10% of the revenue income

-in the proceeding fiscal year.

However, In the following circumstances, the debt bond issued by Government of Nepal and purchased by the Bank shall not be treated as the credit extension :-

If the purchase is made in the secondary market, for the operation of open market consistent with the monetary policy of the Bank.

If the purchase is made in the primary market, when it is necessary in the opinion of the Bank, to maintain stability in the market at the time of primary issue of such securities and such securities are divested within 60 days of purchase.