KATHMANDU: By Sunday, July 14, the day before the end of the last fiscal year, banks and financial institutions had collected deposits totaling Rs 6493 billion and provided loans amounting to Rs 5169 billion. The credit-deposit ratio (CD ratio) of banks has fallen to 77.67 percent due to the lack of increase in credit disbursement compared to deposit collection. Data from Nepal Rastra Bank (NRB) shows that banks have the capacity to extend more than Rs 700 billion in loans while maintaining a CD ratio of up to 90 percent.

While there is more investable capital in the financial system, the external sector of the economy is strong. However, internal economic activity has not been able to pick up pace. NRB is under pressure to implement a flexible and expansionary monetary policy for the current fiscal year to stimulate the economy. NRB has prepared to issue such a policy to help expand economic activities.  

A senior NRB official stated that although data until mid-June forms the basis for NRB's flexible monetary policy, the expansionary policy may not meet businessmen's expectations. "NRB has its own limits, and the monetary policy is issued to keep the economy running as much as possible," the official said.

As of mid-June of the last fiscal year, the country's current account, balance of payments, and foreign exchange reserves were high, and the inflation rate was below target. According to the Current Macroeconomic and Financial Situation Report published by the central bank of Nepal, the current account stood at a surplus of Rs 200.39 billion as of mid-June of the last fiscal year. NRB states that foreign exchange reserves of Rs 196.7 billion are sufficient to cover 12.6 months of imports of goods and services.

Despite a decrease in interest rates, bank lending has not increased, leading to economic contraction. Therefore, monetary policy seems likely to focus on credit expansion. Due to the lack of credit expansion by banks, there is pressure on NRB to introduce a monetary policy that encourages increased lending.

"As requested by the businessmen, the suspension of the working capital loan guidelines and the limit on share mortgage loans will not be removed," said the NRB source. "Risk-weighted arrangements and the loan/mortgage ratio may increase." The official indicated that the monetary policy would also address issues faced by borrowers due to economic downturn, with preparations to facilitate loan restructuring, particularly targeting the construction industry.

There are plans to review credit risk management provisions for the increasing bad debts of banks and financial institutions. The monetary policy will also announce the establishment of a non-banking asset management company for banks. Recently, amendments to the Nepal Rastra Bank Act and the Cooperatives Act have given NRB the authority to monitor cooperatives with an annual turnover above Rs 50 million, which will also be addressed in the monetary policy.

Rastra Bank has already indicated a flexible monetary policy through its review on May 4. This review reduced the risk weight of hire purchase vehicle loans to 1.00 percent and reduced the risk loss to 1.20 percent for loans classified in the good loan category of banks and financial institutions.

The federal government has already announced the budget as well as the policies and programmes for the next fiscal year, targeting 6 percent economic growth and 5.5 percent inflation. Accordingly, the central bank is set to release the monetary policy for the current fiscal year.