Yadav Humagain

July 24: Following an improvement in the external sector indicators of the economy due to the tight monetary policy last year, Nepal Rastra Bank (NRB) on Sunday issued a “cautiously flexible monetary policy” in order to keep the domestic economic activities afloat.

The central bank has made some changes in the monetary policy and included some flexible provisions after the increase in the net savings, comfortable foreign exchange reserves and taming of inflation within the limits. In addition to reducing the bank rate through the policy, the NRB has announced that it will review the existing risk weighting arrangements for share mortgages, real estate and hire purchase loans and also review the current capital loan guidelines. It has indicated that it is trying to address the demands of the private sector.

However, the central bank has indicated that the policy rate will be set based on the ability of the foreign exchange reserves to support imports and the annual target inflation.

During a press conference held after announcing the monetary policy, NRB Governor Maha Prasad Adhikari said that the central bank has become flexible to keep domestic economic activities running while being aware of the state of the economy.

"Tight monetary policy is still in place in the big economies around the world while there is a pressure on inflation," he said, "We have become somewhat flexible to make the internal economy run. The policy will be revised in the future depending on the situation."

Efforts to reduce interest rates

The central bank has tried to reduce the interest rate which had reached a high point due to the previous monetary policy. The policy rate, which was increased by 1.5 percentage points to 7 percent through the monetary policy of the last fiscal year (FY), has been reduced by 50 base points to 6.5 percent in the current fiscal year. Similarly, the deposit collection rate has also been reduced from 5.5 percent to 4.5 percent. The bank rate has been kept unchanged at 7.5 percent.

The bank rate, which was increased by 1.5 percentage points to 8.5 percent last year, was reduced by 1 percentage point to 7.5 percent from the third quarter review of the monetary policy during last FY.

Banks get overnight liquidity facility at policy rate and permanent liquidity facility at bank rate. The central bank said that when the policy rate decreases, the cost of liquidity management of banks will be reduced and the interest rate of loans will be cheaper. However, the ability of banks to extend credit has not increased as the central bank has not changed the mandatory cash reserve ratio (CRR) and statutory liquidity ratio (SLR).

Likewise, in the monetary policy, the central bank has indicated that the policy rate will be set based on the capacity of the foreign exchange reserves to support imports and the annual target inflation, and has also indicated that it will be tightened at any time based on external sector pressure.

Relief for real estate, shares and auto loans

Through monetary policy, the central bank has tried to provide relief to the loans for the housing, real estate, share mortgage and automobile sectors.

The monetary policy mentions that the first residential home loan limit will be increased from Rs 15 million to Rs 20 million. Similarly, the NRB has announced to review the existing risk weighting arrangements for share mortgage, real estate and hire purchase loans. In the press conference, the central bank officials said that the risk burden of share mortgage loans up to 5 million, new real estate loans and auto loans up to 2.5 million will be reduced and maintained at 100 percent.

At present, there is a provision that the risk weight of loans flowing through share securities should be kept at 100 percent in case of loans up to Rs 2.5 million and 150 percent in case of more than that amount. Similarly, in real estate and auto loans, the risk weight is 150 percent. Banks have been reluctant to extend loans in these areas due to the high risk burden. Likewise, the central bank has tried to address the demands of businessmen by stating that the current capital loan guidelines will also be reviewed.

Reduction of microfinance, facilitation of cooperatives

In the past years, the central bank had adopted a policy of reducing the number of banks and financial institutions, but in the current fiscal year, it has announced that it will reduce the number of microfinance institutions. In the monetary policy, it has been mentioned that mergers and acquisitions of microfinance institutions will be encouraged so that existing facilities will be available if integrated transactions are conducted by the end of the current fiscal year (mid-July 2024).

Similarly, NRB announced that the recommendations of the report prepared by the study committee on the problems of microfinance companies will be implemented gradually.

Amid growing demand for the central bank to monitor cooperatives, the NRB said it will facilitate to create a separate institution for monitoring the cooperative sector.

As mentioned in the current year's budget, the monetary policy states that necessary facilitation will be done to establish a separate specialized regulatory body for effective regulation and supervision of savings and credit cooperatives.

Rs 562 billion loan for economic growth

In order to achieve the 6 percent economic growth target set by the government in the budget of the current fiscal year, the central bank has set a target of extending loans of Rs 562 billion. Stating that the priority is to flow financial resources to the productive sector in order to help achieve economic growth, the loan from banks and financial institutions to the private sector in the fiscal year 2023/24 is expected to grow by 11 percent.

The goal of the monetary policy is to manage the monetary system so as not to put pressure on the prices from the monetary expansion and to maintain inflation within 6.5 percent and to maintain the foreign exchange reserves to meet the import of goods and services for at least 7 months.

Although the government has imposed a 5 percent tax to discourage Nepalis from going on foreign trips, the central bank has increased the foreign facility for passport holders. It is mentioned in the monetary policy that Nepalese citizens visiting countries other than India will be provided with facilities exchange for up to US$ 1,500 twice in a year.

Large debtors under surveillance

The central bank has announced that it will monitor the big borrowers through monetary policy. The NRB mentioned that a separate guidelines will be issued to make the supervision of large borrowers effective.

Similarly, the NRB said that the existing Banking Offenses Act, 2064 will be amended in order to assist in controlling non-commercial and disorderly activities that affect the stability of the financial sector. Reforms have also been announced in the monetary policy, including issuing a 'Stress Loan Resolution Framework' to restructure the credit of troubled borrowers, implementing a system for national level development banks to maintain capital in accordance with the Capital Adequacy Framework, reviewing credit investment systems in designated areas, and central customer identification systems based on national identity cards.