Nepal: Central bank measure to hit steel sector

Steel mills in Nepal may be impacted by a recent policy measure from Nepal Rashtriya Bank, the central bank in Nepal. As per the new policy, the cash deposit ratio (CDR) and cash credit ratio (CCR) of banks have been changed. Previously, banks were allowed to loan 90% of their deposits, plus their own capital. However, now, the dollar loan has been brought within the 90% loanable component with the government also removing the capital amount.

For instance, if a bank had capital of NPR 800 crore and the deposits mobilised from the market amounted to NPR 8,000 crore, it would have been able to loan out 90% of this total corpus of NPR 8,800 crore.

Now, it would be allowed to loan out 90% of only the deposit mobilised and the rest will have to be deposited with the central bank, a source from Nepal informed SteelMint, adding, “The total loanable amount has now decreased by 20% or around NPR 50,000 crore in Nepal.”

The move has been implemented with an eye on making banks secure with enough liquidity.

How will Nepal’s steel industry be impacted?

• Steel mills are not being disbursed even part of their previously sanctioned loans, it is learnt.
• Trade channels will not be able to open new LCs as per their requirement and mills will ultimately have to cut production due to lesser demand and offtake.
• It is apprehended that mills will also not be able to stock enough raw material if there is lack of funding.
• No fresh home or infrastructure project loans are being disbursed in Nepal now. Since mostly all residential property purchases are financed by home loans, this segment has been hit, along with infrastructure. As a result, residential and infrastructure projects may slow down, which can impact construction steel demand in Nepal.

In normal circumstances, home and construction project demand would have risen 30% y-o-y, it is learnt.

Outlook

The entire economy will be curtailed by 20% since there will be that much less loan disbursal, sources told SteelMint from Nepal.

“A roll-back of this new policy could possibly be a way out of the crisis,” observed sources.

Many feel banks may have to attract fresh deposits to tide over the crisis. But even if the existing 11% interest on fixed deposits is raised to 13-14%, banks would find it tough to mobilise deposits because of demand drop.