Kathmandu, July 26
The Nepal Rastra Bank (NRB) has unveiled a 'cautiously
flexible' Monetary Policy for the current Fiscal Year 2024/25, removing the
ceiling of margin lending for institutional investors and promoting private
sector lending.
The Monetary Policy made public on Friday has announced a reform
on stance on real estate lending, loans to Small and Medium Enterprises (SMEs)
and laws on cheque dishonour. However, it has maintained that lending to the
manufacturing sector would be promoted and the quality of loans would be
improved to maintain financial stability.
The Board of Directors of the NRB approved the policy on
Friday morning. Earlier, the policy was scheduled to publish last week but it
was delayed amidst the recent change in the government.
The NRB said that the inflation would be contained at 5.0
per cent and the monetary expansion would be made in a way that would not pressurise
the price of goods and services in the market. This target does not look risky
considering the average inflation of 5.62 per cent in the 11 months of the last
Fiscal Year 2023/24 and 4.17 per cent year-on-year basis in mid-June 2024
against the annual target of 6.5 per cent.
Announcing the Policy, Governor of the Nepal Rastra Bank,
Maha Prasad Adhikari, termed it as the 'Monetary Policy with caution' as it
would offer the final facilitation to the businesses and financial sectors that
were impacted by the COVID-19 pandemic.
"We have made arrangements to monitor the impact of
each measure adopted by the Monetary Policy for this fiscal," he said,
stressing that the measures adopted by the Policy would be fully implemented.
According to Governor Adhikari, the central bank has planned
to implement reforms in a few key areas that will help in the business and
economic growth.
"If we try to control everything through the monetary
policy, it will create multiple problems. The main aim of this year's Monetary
Policy is to create interest rate stability, create an investment environment and
facilitate the business. It tries to create the base for the mobilisation of
the deposits in loans," he stated.
Limit for Margin Lending Removed
Although the NRB has granted consent to 34 securities brokerage
companies to mobilise margin lending with the aim of reducing the direct loan
investment from Banks and Financial Institutions (BFIs), it has continued with
the loan against the securities for the institutional investors. It removed the
existing limit of a maximum Rs. 200 million for margin lending.
"In the situation where margin trading cannot be done
easily and systematically, the existing maximum limit of Rs. 200 million for
the loans provided by the BFIs in margin securities for institutional investors
established with the main purpose of investing in the capital market will be
abolished," read the Policy.
Likewise, the existing credit notification and blacklisting directives
will be revised to amend the arrangements such as blacklisting based on check dishonour
and banning banking transactions.
In order to facilitate enterprise development in areas like industries
that support agriculture, information technology and tourism, the provision of
not charging more than a 2 per cent premium on the base rate for SMEs of up to
Rs. 20 million will be reviewed to expand the facility in those areas.
Forex Reserves for Seven Months
Similarly, the Monetary Policy for this year aims at
maintaining the foreign exchange reserves sufficient to cover the import of
goods and services for seven months.
The monetary policy of the FY 2023/24 aimed at maintaining
foreign exchange reserves sufficient to support at least seven months of goods
and services imports, and the foreign exchange reserves maintained in mid-June
are sufficient to support 12.6 months of goods and services imports.
Likewise, the portfolio size for the real estate is
increased to Rs. 25 million from Rs. 20 million.
The new
Monetary Policy has said that mergers and acquisitions between microfinance
financial institutions (MFIs) and their branches will be encouraged. According
to it, to address the complaints related to the services of MFIs, necessary
regulatory arrangements will be made on the basis of international best
practices to protect customer interests. The interest rates of the MFIs will
also be reviewed.
"Arrangements
will be made to reschedule the loan by paying a certain percentage of interest
to microfinance customers who are unable to pay the loan due to various
circumstances," read the Policy.
Similarly,
facilitation will be made in the existing arrangement related to foreign
exchange facilities available through passports.
Asset
Management Company in the Offing
The
central bank also plans to formulate a draft of the Asset Management Act and
submit it to the Government of Nepal to establish an Asset Management Company
to manage the non-banking assets of the BFIs. Necessary infrastructure and
institutional structure will be prepared for the full operation of the National
Payment Switch.
According
to Governor Adhikari, a new arrangement will be made so that the organisations
that perform payment, clearing and settlement activities should be public
limited companies.
He said
that a guideline would be prepared to minimise the risks of Artificial
Intelligence in the financial sector. The central bank will also coordinate
with the government to create a mechanism for the regulation and monitoring of
the saving and credit cooperatives organisations.
The
Monetary Policy has also addressed the programmes announced by the government
through the budget of the current FY 2024/25. They include loans against the
collateral of agricultural produce, promotion of innovation, loans to the
migrant workers based on the assurance of sending remittance to the bank
account, and increased facilitation for the entrepreneurship loan.
Bank/Policy
Rates Go Down
Through
the Monetary Policy, the central bank has brought down the bank rate to 6.5
from the existing and policy rate to 5 per cent from 5.5 per cent.
Governor
Adhikari said that while the inflation is contained, the external sector has
remained strong and interest rates on deposits and lending are going down owing
to the excess liquidity in the banking system in the country, the below-target
performance of the government revenue and expenditure, low expansion of banking
sector lending, and increased non-performing loan portfolio has remained major
challenges.
By
mid-June 2024, the annual growth rate of loans flowing from the BFIs to the
private sector was 5.6 per cent. At the same time in 2023, the growth rate of
such loans was only 3 per cent. The NRB maintained that the credit expansion
has been slow since the capital expenditure cannot be performed on time, the economic
growth rate is low, economic activities are not improving as expected and the
private sector is already heavily indebted.
"Even
when the interest rate of loans is low, if there is no significant improvement
in domestic demand, it will be difficult to improve loan demand only through
monetary policy. When more efforts are made to expand the overall demand of the
economy through monetary easing, financial stability may be at risk if there is
no improvement in the real sector accordingly," read the policy.
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New Provisions for Construction Industry:
(a) Extension of interest payment period of the loans given
to the construction businesses till mid-December 2024.
(b) No blacklisting of construction businesses on the basis
of cheque dishonour unless there is another provision regarding credit notification.
(c) Separate arrangement regarding the limits of credit
rating when using off-balance sheet facilities from banking facilities and
loans taken for construction business.
(d) Maintaining the loan classification and loan loss system
for the loans created by claiming the guarantees of builders for the FY 2024/25
from the date of loan creation, similar to other loans.
(e) Banking operation of the partners of a joint venture
company will not be affected if a partner is blacklisted by a BFI.
(f) Arrangements will be made to renew the guarantee
provided by the BFIs in case of renewal of the construction period by the
Government of Nepal.
New Provisions for the BFIs:
(a) Encouraging the use of capital funds and other
equipment.
(b) Reducing the existing 1.20 per cent loan loss provision
on good loans and to 1.10 per cent.
(c) Reviewing the provisions related to risk weightage for
loan purchase and sale.
(d) Increasing the limit of the existing Regulatory Retail
Portfolio to Rs. 25 million from the current Rs. 20 million.
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