Central bank creates more resources for BFIs

Monetary Policy 2018/19

Kathmandu, July 11:

Nepal Rastra Bank (NRB) has slashed the spread rate from 5 per cent to 4.5 per cent in an attempt to provide relief to private sector investors through the Monetary Policy of the Fiscal Year 2018/19.

Though this move will contribute to slightly reducing the profits of the banks and financial institutions (BFIs), the monetary policy has ensured multiple resource bases for them, which will create additional liquidity in the banking system.

Private sector investors have been seriously impacted by the ever growing interest rates in the past couple of years as the banks have kept on hiking the interest rate since they have had to pay up to 12 per cent interest to the deposits as the banking industry was going through a prolonged liquidity crisis.

Five per cent spread means the banks could charge up to 17 per cent interest on loans against 12 per cent in deposit mobilisation.

The business community welcomes the move, vice-president of the Federation of Nepalese Chambers of Commerce and Industry (FNCC) Shekhar Golchha said and added that the spread rate should have gone down further.

To make the BFIs capable of withstanding the liquidity crisis, the central bank has set a new ceiling for the Cash Reserve Ratio (CRR). The CRR, which is 6 per cent for the commercial banks, 5 per cent for the development banks and 4 per cent for finance companies, has been reduced to 4 per cent for all BFIs.

This single provision will generate an additional Rs. 48 billion liquidity in the banking system.

However, immediate past president of Nepal Bankers Association (NBA) Anil Keshari Shah said that the reduction in the CRR might have a negative impact on the banking sector.

Likewise, the Statutory Liquidity Ratio (SLR) has been reduced from 12 per cent to 10 per cent for commercial banks, 9 to 8 per cent for development banks and 8 to 7 per cent for microfinance companies.

And, the bank rate – interest rate at which the central bank lends money to the BFIs – has been decreased to 6.5 per cent from 7 per cent.

The NRB has cut down on the limit of margin lending from 40 per cent to 25 per cent, which means the banks' loans against the collateral of shares should not cross 25 per cent of their paid up capital.

But, the overall size of the margin lending won’t come down as the paid up capital of a commercial bank has been increased to Rs. 8 billion from Rs. 2 billion.

Through the monetary policy, the central bank has adopted a merger policy for class ‘D’ microfinance institutions (MFIs).

Similarly, the MFIs can mobilise up to Rs. 1 million in loans to micro-enterprise.

The central bank has allowed the commercial banks and MFIs to accept loans amounting to 25 per cent of their paid up capital, or Rs. 2 billion, as of now, in convertible foreign currency and Indian currency from foreign banks.

It has redefined deprived sector lending and made a blanket provision for all BFIs instead of the now existing 5 per cent of total lending in the case of a commercial bank, 4.5 per cent of a development bank and 4 per cent of a finance company.

It has come hard on the overdraft and other revolving individual loans and cut down on the limit of such loans by Rs. 2.5 million, from Rs. 7.5 million to Rs. 5 million. It has adopted a policy of discouraging and controlling such lending, and will create the necessary policies for the same.

According to the new monetary policy, the BFIs need not obtain permission from the central bank to open branches in the rural municipalities.

“A campaign will be launched to open a bank account for all Nepalis within a year, and high school students will also be motivated to open bank accounts,” reads the monetary policy.

A process is to be initiated to establish a national payment gateway.

Direction of the Monetary Policy for FY 2018/19

·        Support for the priorities of the FY 2018/19 budget and government’s policy and programmes.

·        Containing inflation to the desired limit against the pressure created by the increasing expenditure demand in the federal structure and fuel price hike in the international market.

·        External sector stability

·        Focus on mobilisation of financial resources for employment promotion and entrepreneurship development.

·        Support to the government in attaining the 8 per cent growth target in the next fiscal.

·        Increasing financial access, financial inclusion, financial literacy and use of technology in payments.

Published in The Rising Nepal daily on 12 July 2018.