NewBiz Report

Kathmandu, July 28

Nepal Rastra Bank Governor Maha Prasad Adhikari heeded to the pressure from all sides as he unveiled a ‘flexible’ monetary policy paving the way for more credit expansion and regulatory relaxation.

The monetary policy eased many provisions to help the construction sector as contractors are facing financial trouble particularly due to the government's failure to pay their dues.

The private sector’s demand for the working capital guideline has also been addressed by the monetary policy. 

Nepal Rastra Bank on Friday (July 26) unveiled the monetary policy for the current fiscal year, 2024-25, which began on July 16. 

Governor Maha Prasad Adhikari said, while unveiling the policy, that the central bank has continued its agenda of a ‘cautiously accommodative’ monetary policy to make the economy vibrant. 

While the private sector has welcomed the monetary policy, economists argue it might fail to address the issues which have plagued the economy for the past few years.

Despite the availability of excess liquidity in the banking system, stagnation in credit expansion and surge in non-performing loans have troubled the banks and financial institutions.

According to the central bank’s data, the credit expansion to the private sector from Banks and Financial Institutions increased by 5.1% year-on-year in the first 11 months of the last fiscal year, until mid-June. The credit expansion growth target for the last fiscal year was 11.5%.

Similarly, the overall non-performing loans ratio was 3.98 in the first nine months, until mid-April, of the last fiscal year.

Sunil KC, CEO of NMB Bank, said that the new monetary policy has tried to identify and address the issues in the overall economy. 

“It gives the positive vibe to support the vibrant economic activities,” said KC, who is also the president of the Nepal Bankers’ Association. “But, the monetary policy has its own limitations.”

Governor Adhikair said the new monetary policy aims to direct credit expansion towards the productive sectors to help the government achieve its target of 6% growth rate in the current fiscal year. 

For this purpose, the growth rate of the broad money supply and the credit to the private sector from the BFIs is projected to be 12% and 12.5%, respectively.

To boost the demand, the new monetary policy has reduced the bank rate to 6.5% from 7% and the policy rate to 5% from 5.5%, while keeping the deposit collection rate unchanged at 3%.

Bank rate, policy rate and the deposit collection rate are the upper, middle and lower limits of the NRB’s interest rate corridor. 

While BFIs have to pay the central bank an interest as per the bank rate for the Standing Liquidity Facility, policy rate determines the interest in case of overnight repo.

The reduction in bank rate and policy rate is expected to bring down the interest rate on credit in the long run, which contributes to credit expansion. 

Nepal’s construction sector is yet to revive itself from the shocks of post-Covid economic slowdown and surge in oil prices following Russia-Ukraine conflict. The construction sector too has welcomed the new monetary policy.

Besides the external causes, lack of payment from the government has made the matter worse for the contractors, said Rabi Singh, president of the Federation of Contractors’ Association of Nepal (FCAN). “Government still owes us around Rs 60 billion for the completed projects.”

The central bank has tried to address the concerns of contractors by extending the deadline for the repayment of their loans till mid-December this year. The contractors will also not be blacklisted in cases of dishonoured cheques until further provision is made regarding their credit information. 

Singh, from FCAN, said the new monetary policy has attempted to address their concerns.

“We had made the same demand with the same governor when the NRB was formulating a monetary policy for fiscal year 2021-22,” said Singh. “We welcome it, but it has only provided a temporary solution.”

“We are reeling from a lack of capital, but we cannot take additional loans for having a bad credit history. The authorities concerned can revitalise the construction industry by providing us additional loans, equal to at least 25% of our existing loans.”

The new monetary policy, especially the one regarding the construction sector, has surprised economists.

Economist Keshav Acharya argued that the central bank came under pressure after the government’s budget could not help revitalise the economy. It caused everybody, including the private sector and traders, to put their hope on monetary policy, he said. “It is the first time the central bank has talked so much about the construction sector in its monetary policy.”

“The monetary policy diverted from its core objectives,” said Acharya. “It should have been focused on ensuring financial stability to create a favourable environment for investment.”

But people have started to regard it as a policy for expanding credit to the private sector, Acharya added.

Acharya claimed our economic cycle which was hit hard by the Covid pandemic was further disrupted by the then monetary policy after more than Rs. 200 billion was supplied in the market as a refinance facility during the post-Covid period. 

“Though there was a massive growth in credit expansion, the money was not invested in productive sectors, but in speculative sectors such as share market and real estate,” Acharya added. “What is the guarantee that credit expansion, which the new monetary policy envisions, will go to the productive sector?”

The monetary policy also scrapped the Rs. 200 million cap on the share mortgage loans for institutional investors. 

Economist Acharya suspects that big investors will increase their investment in share market by taking loans. “The same cycle might repeat if the money goes to the unproductive sector.”

Below are other key highlights of the new monetary policy:

• Reduction in loan loss provision on performing loans from 1.2% to 1.1% to ease the pressure on the bank's capital fund. 

• To coordinate with the government for making necessary laws for the establishment of a separate mechanism for regulation and monitoring of the cooperatives.
   

• The central bank says it will facilitate the government to return as much as Rs. 500,000 each to depositors of problematic cooperatives, by recovering them from the directors’ properties.

• The monetary policy has postponed the deadline for credit integration under the working capital loans by 1 year.

• “The Rs. 10 million cap fixed for micro, cottage and small industry will be reviewed,” reads the monetary policy. 

• Existing provisions will be reviewed to include industries supporting agriculture, producing farming tools, and sectors related to information technology, tourism and domestic production on the list of sectors which are getting up to Rs. 20 million loan with interest rate at premiums not exceeding 2% on the base rate.

• The private equity and venture capital firms will not be blacklisted if any institution they had invested in gets blacklisted for not being able to repay its debt.

• For the purpose of establishing an Asset Management Company to manage the non-performing and non-banking assets of BFIs, a draft of the Asset Management Act will be made and presented to the government.

• A guideline will be prepared for the maximum utilisation of Artificial Intelligence in the financial sector after carrying out required study and identifying risks.

• The aspiring Nepali migrant workers having labour permits will be provided a collateral-free loan, after assurance that they will send the money home to a bank account.

• The monetary policy has encouraged microfinance institutions for merger and acquisitions. It has also made a provision for rescheduling of loans by paying a certain percent of interest, for customers who are unable to pay their loans at such institutions.

• Increment in the foreign exchange limit for Draft/ Telex Transfer (TT) facilities in the import of goods from $35,000 to $50,000

• Increase in import limit through ‘Document Against payment’ and ‘Document Against Acceptance’ from existing $60,000 to $100,000
• Central bank to move forward the work of designing the Wholesale central bank digital currency (CBDC)

• Necessary infrastructure to be prepared to fully operate the National Payment Switch.

• Required facilitation will be provided for debt restructuring and risk management to entrepreneurs and businesses making regular payments of their loans despite their businesses being shut down.

• BFIs will be able to count certain amounts from regulatory reserves as Tier 2 Capital, in line with the provisions of the Capital Adequacy Framework, 2015, in such a way that total capital fund will not be more than twice the primary capital fund.

• The new monetary policy has also made a provision that banking related operations of a partner company in a joint venture will not be affected if another partner company gets blacklisted.