Central bank policy facilitates credit expansion

The first quarter review of Monetary Policy 2023/24 aims at facilitating banks and financial institutions, which have lending capacity of around Rs 300bn, in credit expansion.

The Nepal Rastra Bank (NRB) has taken a host of measures ranging from reducing rates to easing real estate and margin loans in the monetary policy review. “The central bank has adopted a flexible policy on interest rate corridor as banks have not been able to expand credit as expected,” Nepal Rastra Bank (NRB) Governor Maha Prasad Adhikari said. But those measures have not been proved effective. 

The private sector has been saying that tight monetary policy adopted by the central bank even while the external sector was improving was impeding economic activities in the country. To address the grievances of the private sector, the central bank has lowered the interest rate from 7.5 percent to seven percent. Policy rate too has been reduced to 5.5 percent from 6.5 percent, while deposit collection rate has been reduced to three percent from 4.5 percent.

The first quarter review has also made arrangements to reschedule and restructure loans of good borrowers, who have been unable to pay their loans. The central bank has also instructed banks to provide concessional housing loans to earthquake victims.

Industrialists have welcomed new provisions taken by the monetary policy. Former banker and banking expert Parshuram Kunwar Chhetri, however, called for honest implementation of the monetary policy provisions. “The central bank has reduced policy interest rates to 6.5 percent from seven percent in the monetary policy for the current fiscal year. But the banks increased the rates instead of lowering them,” he added. “In mid-July, the interest rate on individual fixed deposits was 9.98 percent, but banks raised it to 10.26 percent in September.”

Nepal Bankers Association Vice-president Santosh Koirala is of the view that  reduction in policy rates have put pressure on commercial banks to reduce rates. “The provision will provide relief for borrowers. Interest rates will likely come down when banks revise their interest for the month of Magh,” Koirala, who is also the CEO of Machhapuchchhre Bank Ltd, said. “The easing of realty and margin loans will also increase demand for loans.”

The central bank has reduced weighted risk of realty loans and margin loans from 150 percent to 125 percent. This will increase the capacity of banks and financial institutions to extend credit of Rs 40-50bn toward the sector. The decision to raise the monthly installment income ratio for housing loans to 60 percent from 50 percent will enable even low income users to access housing loans.

Banks and financial institutions will be allowed to give residential house loans of up to Rs 2.5m for the reconstruction of houses damaged by the November earthquakes. Banks aren’t allowed to charge a premium of more than two percentage points on the base rate for such loans. Likewise, only people designated as ‘earthquake-affected’ by the authorities concerned can avail such loans.

Banks are also allowed to spend a maximum of 40 percent from the amount deposited in their corporate social responsibility funds from the profit generated in 2022/23 and 2023/24 for reconstruction of public buildings like schools, hospitals and health posts damaged by the earthquake. The central bank has also said it would review the limit on domestic remittances and non-deliverable forward transactions.

Federation of Nepalese Chambers of Commerce and Industry (FNCCI) President Chandra Prasad Dhakal said that the first quarter review has addressed institutional demands placed by them. “The direction taken by the first quarter review is positive. We are now waiting for implementation of the new provisions,” Dhakal added.

Rajendra Malla, president of Nepal Chamber of Commerce, said reduction in policy rate will help to bring interest rates down. “The weighted risk on realty and margin loans should have come down to 100 percent,” he said. 

Rajesh Kumar Agrawal, president of Confederation of Nepalese Industries, said the onus is now on banks and financial institutions to reduce rates. “Earlier, banks had increased rates even when the central bank had lowered them,” he said. He added that the policy provisions in the first quarter review will provide relief to the private sector.