The investment limit for banks and financial institutions licensed to transact convertible foreign currency has been increased, boosting their income and profits. Banks can now invest up to 20 percent of their primary capital in proprietary derivatives transactions, including both the purchase and sale of outstanding amounts. Previously, the limit was 15 percent. Nepal Rastra Bank’s Department of Foreign Exchange Management amended the Unified Circular, raising the limit by five percent.

Licensed ‘A’ category banks must manage their convertible foreign currency investments and mitigate exchange rate risks while ensuring transactions do not involve speculation. Total foreign exchange reserves are held by Nepal Rastra Bank and commercial banks. Increasing foreign exchange investment in banks will enhance their income and profitability, says Ramu Poudel, spokesperson for Nepal Rastra Bank. “Foreign exchange flows into banks, and they are now allowed to invest up to 20 percent of their primary capital. This increase from the previous 15 percent cap will help banks generate higher income and profits,” Poudel told ApEx.

With this change, the central bank will no longer need to absorb excess foreign exchange from the market. The total foreign exchange remains the same, but the portion previously held by Nepal Rastra Bank will now be available to commercial banks. Additionally, banks cannot hold open positions in derivatives transactions; all positions must be squared up. The exposure of such transactions must be reported in convertible foreign exchange, and proprietary transactions cannot exceed a three-month period. If foreign exchange outflows occur while reconciling net accounts, the central bank must be informed as per existing regulations.

This provision also governs foreign exchange balances and derivative instruments that banks and financial institutions can maintain in agency banks abroad. Licensed ‘A’ category banks and national-level ‘B’ institutions may engage in derivatives transactions within the foreign exchange market, following policy criteria set by their boards of directors. They are also permitted to invest convertible foreign exchange balances in their foreign agency banks.