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The government has given approval to the Finance Ministry to form the Recommendation Committee for the appointment of a new Governor of the Nepal Rastra Bank.

A Cabinet meeting held in Baluwatar on Wednesday evening had given approval to the Finance Ministry to take the process ahead for the appointment of a new Governor.

The tenure of Nepal Rastra Bank Governor Maha Prasad Adhikari is ending on April 7.

The government had appointed Adhikari as the Governor for five years on April 6, 2020.

KP Oli was the Prime Minister and Dr Yuvaraj Khatiwada was the finance minister when Adhikari was appointed as the Governor.

Governor Adhikari is hoping to become Governor again. However, according to a source, the Governor will be from the Nepali Congress.

Currently, there is a coalition government of Nepali Congress and CPN-UML.

Nepal Rastra Bank (NRB) has provided over Rs 25.5bn in interest subsidies for concessional loans until mid-December of the fiscal year 2024/25. The government issued integrated procedures for interest subsidies on concessional loans in 2018. It initially covered seven categories with 5-6 percent interest subsidies. This was later amended to include 10 sectors.

The central bank has been providing interest subsidies for 10 different types of loans under the subsidized loan program. The NRB provides subsidies on commercial agriculture and livestock loans both with and without collateral. Similarly, it offers interest subsidies on educated youth self-employment loans, migrant returnee youth project loans, women entrepreneurship loans, Dalit community business development loans, and higher technical and vocational education loans, among others. The NRB has also provided interest subsidies for private housing construction loans for earthquake victims, textile industry operation loans, loans for training provided by institutions recognized by the Council for Technical Education and Vocational Training (CTEVT), and youth self-employment loans.

These loans are distributed through different commercial banks, development banks, finance companies and microfinance institutions. However, banks and financial institutions haven't disbursed concessional loans for the past six months. Central bank officials say they have informally instructed bank and financial institutions (BFIs) not to disburse such loans as funds provided by the government for the program have been used up.

According to the NRB, 113,148 borrowers have availed of loans totaling Rs 172.29bn by mid-December under the interest subsidy program. Commercial banks have disbursed Rs 147.17bn to 96,372 borrowers and development banks extended Rs 22.42bn to 15,166 borrowers. Likewise, finance companies and micro finance institutions approved Rs 2.64bn to 1,550 borrowers and Rs 59m to 60 borrowers, respectively, in subsidized loans.

BFIs cannot charge more than two percent points above their base rate for these subsidized loans. They are also prohibited from charging additional fees except for loan interest, credit information fees, insurance premiums and loan security charges. Interest subsidies are available for up to five years. However, banks are free to determine the total loan period. Women entrepreneurship loans receive a six percent interest subsidy, while other categories receive five percent.

Commercial agriculture and livestock loans are capped at Rs 50m, educated youth self-employment at Rs 700,000 and migrant returnee youth project loans at Rs 1m. Similarly, women entrepreneurship loans are limited to Rs 1.5m, Dalit community business loans to Rs 1m and higher technical education loans to Rs 500,000. BFIs are allowed to disburse up to Rs 300,000 on private housing loans for earthquake victims, while textile industry loans are capped at Rs 50m, CTEVT-recognized training loans at Rs 200,000 and youth self-employment loans at Rs 500,000.

Nepal Rastra Bank (NRB) has proposed stringent standards and guidelines to tighten savings and credit cooperatives. The proposed standards aim to enforce stricter rules on savings, loans, board formation, and institutional governance of cooperative institutions. The central bank prepared the guidelines after recent amendments to the NRB Act, Cooperative Act and related laws granted it the authority to oversee the financial activities of savings and credit cooperatives.

As per the draft standards and guidelines, which have been made public to collect feedback of stakeholders, cooperatives will be permitted to collect savings up to 15 times their primary capital sourced from members. Likewise, loans that cooperatives can avail from banks and financial institutions have been capped at five percent of total assets or 100 percent of primary capital, whichever is lower.

The savings limits prescribed in the Cooperative Act have been incorporated in the guidelines and standards prepared by the NRB. Cooperatives operating within a single district can accept individual savings of up to Rs 1m, while those operating across multiple districts in a province are limited to Rs 2.5m. For cooperatives with working areas in more than two provinces, the maximum savings per individual has been proposed at Rs 5m. Likewise, cooperative institutions will not be allowed to collect fixed deposits.

Board members in cooperatives will be prohibited from taking loans other than those secured by their personal savings. The draft also caps the size of cooperative boards at seven members, with a provision requiring 33 percent female representation wherever possible. Cooperatives must also maintain a capital fund of a minimum of four percent.

Likewise, the guidelines require cooperatives to classify their loans into four categories—good, substandard, doubtful and bad. Loss provisioning for loans has been set at one percent for good loans, 25 percent for substandard loans, 50 percent for doubtful loans and 100 percent for bad loans.

The draft standards and guidelines bar members of a same family from holding positions on a cooperative’s board or supervisory committee at the same time. Likewise, one cannot serve in multiple cooperatives at the same time. Unsecured loans have been capped at Rs 300,000 or five times the savings maintained by the member, whichever is lower.

The NRB has also proposed stricter rules on procurement of fixed assets by cooperatives. Only the cooperatives profitable for three consecutive years, free of accumulated losses and compliant with capital fund requirements will be allowed to purchase land or buildings for office purposes. Such purchases must be made transparently through a competitive process. Cooperatives can spend 25 percent of their primary capital or 50 percent of their reserve fund for such procurements. Such procurement decisions must be approved by at least 51 percent of the general assembly, and the decision must be reported to the regulatory body within 30 days.

The banking sector in Nepal is currently grappling with a multitude of challenges that have far-reaching implications for the economy. One of the most significant issues is a marked decline in dividend distribution. Historically, banks in Nepal were able to deliver a hefty number of dividends. However, in the last fiscal year, many institutions struggled to provide even a 10 percent dividend, with the sector-wide average falling below five percent. This decline has eroded investor confidence, prompting large investment groups to reconsider their stakes in the sector. The shrinking returns on both capital gains and dividends have exacerbated this hesitancy, underscoring the urgent need for reforms to restore trust and stability.

The decrease in dividend capacity is not a result of NRB policies but stems from the individual banks’ operational challenges. Efficient banks have still been able to distribute dividends, with some banks providing dividends of up to 26 percent, while others have not been able to do so. The banking sector’s struggles are primarily driven by external pressures, including market rumors, which have hindered the functioning of lower-level bank branches. This external pressure has added complexities to the financial ecosystem, and despite the solid capital base of the banks, non-performing loans have risen.

Regulatory changes, particularly the proposed amendments to the Bank and Financial Institutions Act (BAFIA), have further complicated the situation. A contentious provision restricting shareholders who hold more than one percent of a bank’s shares from obtaining loans from other financial institutions has raised concerns among stakeholders. Historically, industrialists have played a pivotal role in establishing banks, but such measures could compel them to liquidate shares or settle loans, leading to market instability. These regulatory changes, coupled with declining demand and operational strain, have stifled the sector’s growth potential. In this context, the Nepal Rastra Bank (NRB) has introduced provisions designed to protect the financial system and avoid a panic scenario. These measures are meant to ensure stability without stifling the long-term viability of the sector.

Economic downturns have also driven a sharp increase in non-performing assets (NPAs), a critical metric for assessing financial health. The average NPA ratio has risen from 1.67 percent two years ago to approximately 4.5 percent, with some ‘C’ category financial institutions reporting NPAs exceeding 10 percent. Even with loan restructuring facilities, NPAs remain near five percent, posing a significant threat to the sector’s stability and the broader economy. Weak loan demand and structural challenges continue to compound these risks, further destabilizing the financial system. This reflects the broader macroeconomic challenges, as well as the unique pressures faced by the banking sector.

The NRB recognizes these challenges and has been working on regulatory frameworks that aim to ensure the resilience of the banking system. While some banks have faced difficulties in profitability, it is essential to note that the NRB’s measures are intended to safeguard the sector, providing the necessary framework for long-term stability. For instance, while external issues have raised questions about profitability, it is clear that banks cannot operate without profitability, and returns on capital investments are critical for sustained operations. The NRB's efforts are geared toward ensuring that the banks remain operational and sustainable, even amid a challenging environment.

Profitability in the banking sector has significantly declined. The return on equity (ROE), a key indicator of financial performance, fell from 21.94 percent in FY 2021-22 to just 4.80 percent in FY 2023-24. Reduced net interest income, weak loan demand and regulatory constraints on fee and commission income have collectively strained earnings. Operational costs, particularly investments in IT infrastructure and compliance, have added to these pressures. While banks like Standard Chartered Bank and Everest Bank reported relatively higher ROEs, others, such as Nepal Bank, struggled to remain profitable. Despite these challenges, NRB’s approach to banking supervision is aimed at creating a balanced environment where the banks are supported through difficult periods without compromising the sector’s financial health.

Credit expansion has been stagnant these days mainly due to the lack of demand. A mismatch between liquidity and demand further compounds the problem, leaving banks with substantial liquidity but limited opportunities for productive lending. This scenario underscores the need for a balanced regulatory framework that promotes both stability and growth. While the NRB’s policies may limit some aspects of banking operations, they are designed with the long-term health of the sector in mind, ensuring the banking system remains solvent and resilient even during challenging periods.

Nepal’s broader economic structure adds another layer of complexity. The government faces a revenue deficit of Rs 170bn, low capital expenditure and high recurrent costs, all of which highlight fiscal imbalances. Federalism has introduced additional financial burdens without commensurate resources for development. High debt-servicing obligations strain the budget further, forcing the government to issue treasury bills even for routine expenditures. Stagnation in the real estate sector and declining investor morale exacerbate these economic pressures, highlighting the need for systemic reforms.

Leadership in the banking sector is undergoing significant changes. Younger leaders, often with decades of experience, are driving digital transformation and operational efficiency. At leading banks, approximately 80 percent of transactions are now digital, enhancing customer satisfaction and streamlining operations. However, aggressive lending strategies aimed at stimulating loan growth have often compromised profitability. A more sustainable approach that aligns banking operations with national development goals, such as job creation and productive investments, is essential for long-term stability.

While some macroeconomic indicators provide grounds for cautious optimism, the persistent lack of credit demand in productive sectors remains a concern. Stabilized foreign exchange reserves and declining interest rates offer a foundation for recovery. However, a comprehensive review of federalism’s fiscal structure, along with targeted expenditure cuts, is critical to avoid a potential debt trap. Transparent collaboration between the private sector and the state can help restore confidence and drive economic recovery.

To address these challenges, a multi-faceted approach is essential. Regulatory frameworks should be revised to strike a balance between stability and growth. Encouraging productive lending and reducing excessive constraints can create a more conducive environment for banking operations. Establishing high-level commissions to address systemic issues and promote transparent collaboration between the private sector and the state is crucial. Additionally, investments in technology and innovation will enhance operational efficiency and customer satisfaction.

The NRB’s policies are continually evolving to ensure the stability of the banking sector while navigating the external challenges it faces. The regulator remains committed to safeguarding the financial system’s integrity, ensuring that both stability and growth can coexist in the long term. Banks are expected to adapt to the changing economic landscape while continuing to contribute to national development. The NRB’s framework aims to foster a balance between operational efficiency, profitability and financial stability, ultimately enabling the banking sector to thrive in challenging economic times.

In a nutshell, while the banking sector in Nepal faces significant challenges, a concerted effort to implement targeted reforms and foster collaboration between stakeholders can pave the way for recovery and growth. By addressing structural inefficiencies and focusing on sustainable practices, the sector can overcome current adversities and emerge as a cornerstone of Nepal’s economic stability and progress. The path forward requires bold decisions, innovative solutions and a collective commitment to building a robust and resilient financial system that supports the nation’s aspirations for sustainable development.

The author is deputy director at Nepal Rastra Bank

Six development banks and finance companies are under the scrutiny of Nepal Rastra Bank (NRB) after Karnali Development Bank was declared problematic on Dec 25. The central bank took over the management of Karnali Development Bank after it was found that the Class ‘B’ bank had submitted a fake deposit certificate, claiming it had deposits in commercial banks.

Earlier this week, the NRB wrote a letter to different commercial banks, requesting them to furnish details of deposits maintained by these six institutions. An internal investigation by the central bank showed that funds in the Class ‘B’ bank were misappropriated with the involvement of Karnali’s former Executive Chairperson and CEO Rajendra Bir Raya, former CEO Dinesh Kumar Rawat, former Finance Department Head Mahadev aka Bed Prakash Thakuri, and incumbent CEO and Finance Department Head Niraj Bikram Shah.

While the bank’s core banking system showed a balance of Rs 227.46m in Karnali Development Bank’s Cash Reserve Ratio (CRR) account at NRB as of 22 Dec 2024, the investigation committee found the account did not have the said funds. The investigation committee also reported that the bank’s senior management covered up the misappropriation by creating fake balance certificates from other banks.

The central bank wrote letters to different commercial banks, requesting them to send details of deposits maintained by Saptakoshi Development Bank, Excel Development Bank, Narayani Bikas Bank, and Sindhu Bikash Bank as well as Janaki Finance and Pokhara Finance.

While share prices of a majority of Class ‘A’ banks, which have better corporate governance compared to these institutions,  are below Rs 300 per unit, shares of these institutions are traded at as high as Rs 1,100 per unit on the bourse.

NRB sources say they have begun analyzing the liquidity situation of four development banks and two finance companies with weak financial conditions and governance issues.

An NRB official said they are taking stock of the liquidity situation in these institutions before taking required action. “Our efforts will be on resolving the issue through the management of the concerned financial institutions themselves,” the official added.

About a decade ago, the central bank formed a dedicated Problematic Institutions Management Department and managed 16 banks and financial institutions.

In a continued effort to manage the country’s financial system, Nepal Rastra Bank (NRB) absorbed
Rs 50bn from the market through a 21-day deposit collection auction on Sunday. This is the central bank’s second major liquidity absorption in recent weeks. The NRB mopped up Rs 100bn liquidity from the banking system on Nov 27. 

According to bankers and the central bank data, the banking system currently holds an unprecedented Rs 760bn in investable funds. Investable funds of banks and financial institutions are expanding in recent months with deposit collection consistently outpacing credit disbursement. 

Experts say this liquidity glut is symptomatic of broader economic challenges including weak economic activity that has significantly reduced demand for goods and services. The reduced economic activities have had cascading effects on the economy. Reduced consumer and business spending has led to decreased import volumes, which has directly impacted government revenue collection. This has forced the government to rely on public debt even to pay the salary of government employees.

Despite the central bank’s efforts to stimulate economic activity by easing monetary policy for the current fiscal year, credit demand has shown minimal improvement. As a result, the central bank kept policy rates unchanged in the first quarter review of the monetary policy for the current fiscal year on Friday. According to the central bank, the bank rate and policy rate have been maintained at 6.5 percent and five percent, respectively. The NRB has also kept the credit-deposit ratio, statutory liquidity ratio and cash reserve ratio unchanged.

The low demand for bank credit amid a slowdown in economic activities has driven interest rates to record lows. The average loan interest rate has dropped to 9.33 percent while the average deposit rate sits at 5.44 percent. Most commercial banks are now offering loans within an 8-9 percent interest rate range for the month of Mangsir (mid-November to mid-December).

The interbank lending rate has also declined to three percent. NRB starts mopping up liquidity from the market when interbank lending rate comes down to three percent, to prevent further rate erosion. The deposit collection auction is one of the important tools that the central bank has been deploying to absorb excess liquidity. Banks also have the option to park their surplus funds in the permanent deposit facility, which offers a fixed three percent interest rate.

The country has received Rs 407.31bn in remittances in the first three months of the current fiscal year (2024-25).

“Remittance inflows increased 11.5 percent to Rs 407.31bn in the review period compared to an increase of 25.8 percent in the corresponding period of the previous year,” Nepal Rastra Bank (NRB) stated in the Current Macroeconomic and Financial Situation of Nepal Report, which is based on three months’ data ending mid-October.

In US dollar terms, remittance inflows reached $3.04bn in the review period which was $2.76bn in the same period of the previous year, according to the NRB.

The central bank said the number of Nepali workers taking first-time approval for foreign employment stands at 110,654 and taking approval for renewed entry stands at 59,939 in the past three months. In the review period of the previous year, the number of workers taking time-time approval for foreign jobs was 113,397.

A surplus of Rs 111.87bn

The current account of the government remained at a surplus of Rs 111.87bn in the review period compared to a surplus of Rs 59.65bn in the same period of the previous year. “In the review period, net capital transfer amounted to Rs 2bn and foreign direct investment inflow (equity only) remained at Rs 4.81bn,” according to the NRB.

Meanwhile, the Balance of Payments (BOP) remained at a surplus of Rs 184.99bn in the review period while it was at a surplus of Rs 101.66bn in the corresponding period of the previous year.

The report stated that the gross foreign exchange reserves increased 9.4 percent to Rs 2,232.28bn in mid-Oct 2024 from Rs 2,041.1bn in mid-July 2024.

It said that the year-on-year unit value export price index, based on customs data, increased 2.9 percent and the import price index decreased 3.5 percent in the past three months. The terms of trade index increased by 6.5 percent in the review period.

The net services income remained at a deficit of Rs 23.29bn in the review period compared to a deficit of Rs 29.39bn in the corresponding period of the previous year.

Trade goes down

During the three months, the country’s exports and imports decreased by 6.1 percent and 4.2 percent, respectively. The exports decreased by 6.1 per cent to Rs 38.38bn compared to a decrease of 2.3 percent in the same period of the previous year. Exports to India, China and other countries decreased by 5.3 percent, 24.8 percent and 6.6 percent, respectively whereas the export of soybean oil, tea, particle board, shoes, sandals and oil cakes increased even as exports of zinc sheet, palm oil, cardamom, juice and readymade garments decreased in the review period.

The imports decreased 4.2 percent to Rs 390.75bn compared to an increase of 1.7 percent a year ago. Destination-wise, imports from India, China and other countries decreased 3.9 percent, 1.5 percent and 7.9 percent, respectively.

The total trade deficit decreased four percent to Rs 352.37bn during the first three months of the current fiscal year against a 2.1 percent increase in the corresponding period of the previous fiscal. The export-import ratio decreased to 9.8 percent in the review period from 10 percent in the corresponding period of the previous year.

The consumer price increased by 4.82 percent in mid-October compared to 7.5 percent a year ago. Food and beverage inflation stood at 7.18 percent whereas non-food and service inflation stood at 3.49 percent in the review period.

Under the food and beverage category, the year-on-year price index of vegetables increased by 25.15 percent, pulses and legumes by 10 percent, cereal grains and their products by 9.57 percent and ghee and oil by 4.98 percent but the price index of meat and fish sub-category decreased 1.18 percent.

Although foreign investment commitments are on the rise, actual investment inflows have seen a slowdown in recent years.

According to Nepal Rastra Bank (NRB)—the central monetary authority, net foreign direct investment (FDI) inflow was Rs 19.48bn in 2019/20. Net FDI inflows improved slightly to Rs 19.51bn in 2020/21 when the Covid-19 pandemic was at its peak. However, FDI inflows started to decline in 2021/22. The declines were more severe in fiscal years 2022/23 and 2023/24.

Data provided by the central bank shows FDI inflows dropped to Rs 18.56bn in 2021/22. Such inflows marked a sharp decline to just Rs 6.17bn in 2022/23. Although FDI inflows recovered slightly to Rs 8.4bn 2023/24, it was still 56.87 percent lower compared to 2019/20.

The slowdown in FDI inflow is expected to continue in the current fiscal year as well, as Nepal has received net FDI inflow of Rs 2.71bn only in the first two months of the current fiscal year 2024/25.

While the central bank's FDI inflow figures paint a disappointing picture, investment commitments have been increasing in post-covid years. Nepal received foreign investment commitments of a whopping Rs 61.9bn 2023/24. However, the central bank says that only around 35 percent of investment commitments typically materialize as net investments.

Experts say the government’s loose monetary and fiscal policies created a favorable environment for domestic investment in the post-covid years. This encouraged foreign investors to commit funds to Nepal. However, investors are keeping their investment on hold due to tighter policies in successive years.

The Foreign Investment and Technology Transfer Act, 2019, has laid the ground for foreign individuals, firms, companies, non-resident Nepalis, foreign governments, international institutions, and organized institutions to bring capital, technology and other investments to Nepal.

In 2023/24, only 13.59 percent of foreign investment commitments materialized. According to the Department of Industry (DoI), foreign investment approvals during the year totaled Rs 61.78bn. However, data from the central bank reveals that net foreign direct investment (FDI) inflows stood at just Rs 8.4bn.

The trend of low FDI realization is not new. In 2022/23, net FDI inflows were Rs 6.17bn, representing only 16.06 percent of the Rs 38.4bn in approved foreign investments. Similarly, in 2021/22, Nepal received foreign investment commitments of Rs 54.15bn, but only 34.27 percent, or Rs 18.56bn, turned into actual inflows.

For the current fiscal year, the DoI has received foreign investment commitments worth Rs 18.66bn in the first four months alone. These commitments were made by 263 firms that secured investment approvals during the period.

Real-Time Gross Settlement (RTGS) transactions increased significantly in the first month of the current fiscal year 2024/25 (mid-July to mid-August), a recent study report of the Nepal Rastra Bank  (RRB) shows.

A total of 74,380 individuals conducted RTGS transactions worth Rs 1080.3bn during the review month. This is an increase of 65.13 percent compared to total RTGS transactions of Rs 654.11bn in the previous month (mid-June to mid-July). The number of transactions between mid-July to mid-August (2.86m), however, was lower compared to mid-June to mid-July when 2.98m RTGs transactions were conducted, Monthly Payment Systems Indicators Report of the central bank shows.

RTGS refers to a funds transfer system in which the transfer of funds between one bank and another takes place in ‘real time’ and on a ‘gross’—transaction by transaction—basis.

During the first month of 2024/25, people withdrew Rs 87.87bn from ATMs, a slight decrease compared to Rs 91.26bn withdrawn by 11.21m people in the previous month of mid-June to mid-July. 

Transactions through ConnectIPS saw a decline in both the number of users and transaction volumes during mid-July to mid-August. According to the report, 6.84m users processed total transactions worth Rs 525.33bn through connectIPS during the review month, down from Rs 666.58bn processed by 7.79m in the previous month. 

According to the report, transactions through internet banking saw an increase to Rs 22.49bn in the first month of the previous fiscal year (mid-July to mid-August), compared to Rs 17.73bn in mid-June to mid-July. The number of people doing internet banking transactions also increased to 409,065 from 351,301 transactions during the period. Mobile banking transactions also increased to Rs 377.63bn in the review month compared to Rs 373.97bn in the previous month.

Transaction through digital wallets increased by 14.55 percent to Rs 43.69bn during mid-July to mid-August compared to Rs 38.14bn. The number of transactions, however, fell to 30.87m, down from 32.1m in the previous month. 

QR-based payments increased to Rs 62.28bn during mid-July to mid-August compared to Rs 61.73bn in the previous month. Such transactions during the review month, however, recorded more than 100 percent growth compared to the last first month mid-July to mid-August of last year when QR-payments worth Rs 29.99bn were recorded.

The Nepal Rastra Bank (NRB) made public the monetary policy for the fiscal year 2024/25 on Friday.

The monetary policy was made public following the approval from the meeting of the Board of Directors held today.

Nepal Rastra Bank Governor Maha Prasad Adhikari made public the monetary policy from the building of the Nepal Rastra Bank in Baluwatar.

The Nepal Rastra Bank (NRB) has presented five-point suggestions to address the problems of financial cooperatives.

In today's meeting of the Parliamentary Probe Special Committee formed to investigate the misuse of savings of depositors in financial cooperatives, NRB Governor Maha Prasad Adhikari shared that problems seen in the cooperatives sector could be resolved by following the-five-point suggestions.

Governor Adhikari suggested returning the savings of the depositors in three phases. He suggested that savings up to Rs 100,000 of the depositors could be returned in the first phase, while up to Rs 500,000 in second phase and more than Rs 500,000 in the third phase.

The NRB has forwarded a proposal to form a dedicated group to resolve problems as well as to move ahead following the measures adopted while addressing the problems of banks.

He advised that necessary arrangements should be made on the issue of cooperatives that have functioned without restriction of geography.

 Similarly, Chief Executive Officer of Credit Information Bureau, Anil Chandra Adhikari suggested making arrangements for an integrated Information System at the Bureau.  Establishment of a separate information bureau on the issues of insurance and cooperatives was suggested in the meeting.

Alerting about possible problems to be surfaced in other financial institutions like that of cooperatives, President of Nepal Bankers' Association, Sunil KC laid emphasis on the need of resolving the problems soon.

Coordinator of erstwhile cooperative suggestion taskforce, Dr Jay Kanta Raut, explained that problems are increasing in the cooperatives sector for lack of implementation of the suggestions.

Most of the financial cooperatives are operating against cooperatives norms, values and principles are in problems, he added.

Experts laid emphasis on the need of establishing a Credit Recovery Tribunal in the financial cooperatives sector.

On the occasion, Chairperson of the Special Committee Surya Bahadur Thapa said the Committee has not started discussions on whether the government should pay the victim cooperatives' depositors. Discussions are underway keeping it in mind that returning the savings of depositors was the main responsibility of cooperatives. 

Officers who had already worked as registrar of the Cooperative Department after 2048 BS have been invited for tomorrow's meeting.    Similarly, discussions would be held with the financial cooperatives' victims in other meetings.

Nepal Rastra Bank has reported that inflation was around 4.5 percent in the last Nepali month of Baishakh. According to the central bank's report, which includes data from the first 10 months of the fiscal year 2080-81, the annual point-to-point consumer inflation in Baishakh was 4.40 percent, down from 7.41 percent in the same month last year.

In Baishakh, the inflation rate in the food and beverage category was 6.27 percent, while in the non-food and services category, it was 2.96 percent. The annual point-to-point price index for the vegetable subgroup under the food and beverage category increased by 23.11 percent, pulses and legumes by 10.85 percent, spices by 8.98 percent, food and food-related items by 7.42 percent, and sugar and sugar-related items by 7.25 percent. However, the price index for the ghee and oil subgroup decreased by 7.13 percent.

The annual point-to-point price index for various goods and services under the non-food and services category increased by 12.26 percent, education by 5.64 percent, and clothing and footwear by 3.46 percent, while the communication subgroup's price index decreased by 0.48 percent.

In Baishakh, the annual point-to-point consumer inflation was 4.30 percent in Kathmandu Valley, 4.32 percent in the Tarai, 4.7 percent in the Hills, and 4.22 percent in the Mountains. In the same month last year, inflation rates in these regions were 7.68 percent, 7.15 percent, 7.57 percent, and 7.12 percent, respectively.

Forex reserves at Rs 1.94trn

The central bank's report also highlighted foreign exchange reserves, which increased by 26.2 percent from Rs 1.53trn at the end of Asar 2080 to Rs 1.94trn in Baishakh 2081. In terms of US dollars, foreign exchange reserves rose by 24.2 percent from $11.71bn at the end of Asar 2080 to $14.54bn at the end of Baishakh 2081.

Of the total foreign exchange reserves, those held by the central bank were Rs 1.34bn at the end of Asar 2080, which increased by 28 percent to reach Rs 1.72bn at the end of Baishakh 2081. Reserves held by banks and financial institutions (excluding Nepal Rastra Bank) were Rs 193.59bn at the end of Asar 2080, which increased by 13.8 percent to Rs 220.38bn at the end of Baishakh 2081.

According to the central bank, based on import data from the first 10 months of the fiscal year 2080-81, the banking sector's foreign exchange reserves are sufficient to cover 15.1 months of goods imports and 12.6 months of goods and services imports.

Remittances reach Rs 1.19trn

According to Nepal Rastra Bank, remittances increased by 19.2 percent to Rs 1.19trn in the first 10 months of the current fiscal year 2080-81. 

Although the number of people going abroad for employment was high in the past two years and has decreased slightly this year, the total number, including new labor permits and renewals, is still more than 500,000. Due to the high number of Nepalis going for foreign employment in the past two years, remittances have seen a significant increase.

In the first 10 months of the current fiscal year, 374,887 Nepalis received final labor approval for foreign employment, and 237,893 received renewed labor approval. In the same period last fiscal year, 421,279 Nepalis received final labor approval for foreign employment, and 238,976 received renewed labor approval.

During this period, net transfers increased by 17.2 percent to Rs 1.30trn.

The Nepal Rastra Bank (NRB) has, through the third quarter review of the monetary policy of the current fiscal year 2023/24, reduced the risk weightage of vehicle loans.

The risk weightage on hire purchase loans provided by banks and financial institutions has been reduced to 100 percent from the existing 125 percent.

Similarly, a provision has been brought allowing for the extension of loans for home purchases based on the Debt Service to Gross Income Ratio, from the existing 50 percent to 70 percent, based on the presentation of appropriate evidence.

In the review of the monetary policy, the Central Bank has introduced a provision where banks and financial institutions can sell up to 20 percent of their primary capital in a single fiscal year from investments made in the mid-category.

Likewise, the loan loss requirement provision for loans classified as 'good loans' from banks and financial institutions has been maintained at 1.20 percent from the existing 1.25 percent.

According to the NRB, the existing provision related to import and sale of silver would be reviewed. The flexibility outlined in the annual monetary policy has been continued in the third quarterly review, added the NRB.

"Based on the current internal and external economic conditions and outlook, the policy rate of 5.5 percent, the deposit collection rate under the interest rate corridor of 3.0 percent and the bank rate of 7.0 percent has remained unchanged," reads the third quarter review.

The provision of permanent deposit facilities would be reviewed as necessary to ensure the effectiveness of interest rate corridor as well as necessary facilitation would be provided for the use of additional instruments to further strengthen the capital base of banks and financial institutions.

The latest macroeconomic data indicates that the economy has not been able to come out of recession. Experts also say that although the external sector looks strong, economic indicators show that the country’s internal sector is weakening.

The Macroeconomic Situation Report of the first seven months of the fiscal year 2023/24 released by the Nepal Rastra Bank (NRB) shows remittances inflow has remained the mainstay of the economy’s external sector. Like in the past fiscal year, remittances inflow is increasing significantly in the current fiscal year. Because of this, the current account and balance of payments are in a surplus situation and have helped increase liquidity, create domestic demand, and reduce pressure on bank interest rates. BoP surplus, however, is due to a drop in imports and rising remittances flow.

NRB data shows the current account and balance of payments are both in surplus, amounting to Rs 161.69bn and Rs 297.72bn, respectively, over the first seven months of the current fiscal year. In the same period of the last year, the current account was in a deficit by Rs 40.16bn, while the balance of payments was in a surplus of Rs 128.55bn.

Foreign exchange reserves have improved to Rs 1,844.94bn at the end of the seventh month. This is sufficient to cover merchandise imports for 14.7 months and merchandise and service imports for 12.3 months, according to the report.

Imports during the first seven months were down by 1.8 percent, while exports have fallen by 7.1 percent.

Former executive director of NRB, Nara Bahadur Thapa, said the balance of payments wouldn't be in such surplus had imports picked up. “Foreign exchange reserves would have also gone down, and inter-bank rates also wouldn’t have gone below three percent,” Thapa added.

A drop in interest rates hints at recession, according to Thapa. “Imports have fallen due to a drop in domestic demand as many people are moving out of the country due to recession. This does not bode well for the country.”

Thapa suggested that the government come up with programs to increase domestic demand. “The government should be able to spend its capital budget and clear its outstanding dues,” he said.

Since domestic demand is not rising and demand for loans is not picking up, banks and financial institutions are awash with loanable funds.

Economic Dr Chandra Mani Adhiakri argues that although the external sector has improved, this will not be sustainable. “Our external sector is looking good as remittances inflow is rising. This has also improved our foreign currency reserves,” Dr Adhikari said. “But we cannot say our economic situation has improved based on this data. It shows a gap in our economy as domestic investment is not increasing. Also, exports are down by seven percent.”

Nepal’s net service income is at a deficit of Rs 37.26bn over the first seven months of 2023/24. Nepal’s income from the tourism sector was Rs 45.4bn in the review period, while Nepalis traveling abroad have taken with them foreign currency worth Rs 104.75bn, including Rs 66.64bn to fund higher education alone. Higher education expenses in the same period of the previous fiscal year were Rs 43.74bn.

The government’s revenue, which fell by 16.1 percent in the first seven months of 2022/23, has increased by 10.2 percent in the review period of the current fiscal year. However, the government has been able to mobilize only 44 percent of its revenue target in the seven months of 2023/24. Dr Adhikari said the government might have to borrow to bridge the revenue shortfall. “Also, capital expenditure hasn't gone above 25 percent even though recurrent expenditure has already gone above 50 percent. Such dismal spending will not stimulate private sector spending,” he added.

While banks and financial institutions have seen their deposits go up by 7 percent in the review period, their credit expansion has seen a slower growth of 4.1 percent.

Inflation, however, is gradually moderating. NRB data shows consumer price inflation came down to 5.01 percent in the seven months. While prices of lentils and cereals, dairy products, food products, and vegetables have gone up, the price of oil and ghee has come down by 12.33 percent. There, however, are risks of fuel and food prices fluctuating due to conflict in Ukraine-Russia and West Asia.

The macroeconomic report for the first half of the current fiscal year and the mid-term review of the monetary policy for fiscal year 2023-24, recently released by the Nepal Rastra Bank, shows positive developments in the external sector of the economy. The economy has experienced strong performance in sectors such as mining, construction, tourism and financial services. The resurgence of tourism after Covid has been remarkable, with a substantial increase in tourist arrivals contributing to economic activities and income generation. Infrastructure development, particularly in the energy sector, is expected to enhance production potential. Foreign exchange reserves have reached an impressive Rs 1,816.57bn by mid-January. This achievement is primarily fueled by a notable 25.3 percent increase in remittances amounting to Rs 733.33bn, which undoubtedly paints a positive picture of Nepal's external sector.

Prudent policy adjustments such as maintaining interest rate stability and implementing targeted measures like lowering interest rates for institutional fixed deposits in the mid-term review of monetary policy demonstrate a proactive approach to mitigating risks and stimulating economic activity. The Nepal Rastra Bank's decision to maintain the interest rate corridor while implementing measures to enhance its effectiveness shows its commitment to balanced monetary policies. Moreover, the focus on supporting agriculture and small to medium enterprises through regulatory retail portfolio arrangements reflects a dedication to growth and economic resilience.

While a healthy foreign exchange reserve is essential for economic stability, it is not a solution to all of our economic problems. The decline in exports, slow import growth, manufacturing slowdown, low demand for bank loans from the private sector and the lack of investment despite favorable conditions highlight the underlying issues plaguing our economy. The government has been consistently missing revenue targets. It is crucial to accurately assess economic indicators and devise appropriate policies. Worryingly, both the government and the central bank seem to be falling short in this regard. It is high time for the government and the central bank to shift their focus from highlighting nominal successes to implementing meaningful changes.

The half-yearly review of the current fiscal year 2080-81 BS (2-23-24), showed the Gross foreign exchange reserves stood at NPR 1816.57 billion (USD 13.69 billion), with a 18-percent rise in the past six months.

According to the current macroeconomic and financial situation of Nepal based on the six months data ending in mid-January assessed by the central bank, the current size of the foreign exchange reserves is bigger than the country's annual budget and this is the highest forex reserves so far. 

The report states gross foreign exchange reserves increased 18.0 percent to Rs 1816.57 billion in mid-January 2024 from Rs 1539.36 billion in mid-July 2023. In the US dollar terms, the gross foreign exchange reserves increased 16.9 percent to 13.69 billion in mid-January 2024 from 11.71 billion in mid-July 2023.

Of the total foreign exchange reserves, reserves held by NRB increased 18.9 percent to Rs 1600.23 billion in mid-January 2024 from Rs 1345.78 billion in mid-July 2023.

Reserves held by banks and financial institutions (except NRB) increased 11.8 percent to Rs 216.35 billion in mid-January 2024 from Rs 193.59 billion in mid-July 2023. The share of Indian currency in total reserves stood at 22.5 percent in mid- January 2024. Based on the imports of six months of 2023/24, the foreign exchange reserves of the banking sector are sufficient to cover the prospective merchandise imports of 14.5 months, and merchandise and services imports of 12.1 months. The ratio of reserves-to-GDP, reserves-to-imports and reserves to-M2 stood at 33.8 percent, 100.9 percent and 27.7 percent respectively in mid-January 2024.

Such ratios were 28.6 percent, 83 percent and 25 percent respectively in mid-July 2023.

The current account remained at a surplus of Rs 161.62 billion in the review period against a deficit of Rs 35.57 billion in the same period of the previous year. In US Dollar terms, the current account registered a surplus of 1.21 billion in the review period against a deficit of 279.6 million since the same period last year.