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Nepal Rastra Bank (NRB) has amended working capital loan guidelines following pressure from the government and the private sector. The revised guidelines provide flexible provisions, especially for the manufacturing sector.

Issuing a circular on Monday, the central bank has given relief to the manufacturing sector. thereby giving a boost to the country’s productive segment. The term ‘manufacturing industry’, according to the NRB, refers to an industry that adds value to raw materials or semi-finished goods through human effort or machinery.

The central bank through the new amendment has relaxed several provisions that were initially put in place to curb the potential misuse of loans. The working capital loan guidelines have been a contentious point of debate between the private sector and the central bank over the past year. Ever since the implementation of the guidelines, the private sector has been lobbied hard for its suspension, terming the guideline as the 'major obstacle to the business and private sector growth'.

The central bank implemented the guidelines starting on October 18, 2022. The essence of bringing working capital loan guidelines was to stop the misuse of the bank money taken to meet short-term commercial needs for an unlimited period of time and outside of the purpose. The central bank has sought to discourage practices of misuse of working capital loans, a significant portion of which businesspersons use to invest in real estate and the stock market, after getting such loans from banks and financial institutions. 

 Of late, business bodies have been lobbying for its revision saying that the working capital loan guidelines was the main reason for the economy slowing down. In view of growing discontent,  Prime Minister Pushpa Kamal Dahal and Finance Minister Prakash Sharan Mahat have also instructed the central bank to relax the guidelines.

 As per the new amendment, manufacturing industries will not have to comply with the guidelines while using loans up to Rs 30m. Earlier, this limit was only up to Rs 10m.

 Similarly, the loan limit of fluctuating working capital needs that industries can take for one year has been increased to 40 percent of the annual turnover from the existing 25 percent. Businessmen have been demanding to increase this limit.

 The central bank has also increased the working capital loan limit for the manufacturing sector to Rs 40m from the existing Rs 20m. Now, while determining the working capital loan limit of up to 40m rupees for the manufacturing industry, it is stipulated that the total working capital loan limit should be maintained only up to the maximum amount of 20 percent of the estimated annual turnover/sales.

 The central bank has allowed banks to provide working capital loans up to 50 percent of the maximum annual turnover based on the industries' operating cycle, cash conversion cycle, days sales outstanding, inventory conversion period, lead time, and accounts payable period.

 The new amendment has changed the previous provision of reducing working capital loans to zero for seven consecutive days after the third year of implementation of the guidelines, allowing at least 10 percent of the amount to be retained in the account annually. Industrialists and businessmen have been demanding that the provision to reduce the working capital loan to zero is unreasonable and should be abolished.

 Additionally, a provision has been established for granting emergency working capital loans to seasonal businesses (e.g., those involved in purchasing chemical fertilizers, festival-related enterprises, etc.) based on justifications.

 The central bank Spokesperson Dr. Gunakar Bhatta said that the guidance has been revised to invigorate economic activities. According to Bhatta, more concessions have been given to the manufacturing sector. "While the amendment has provided ease to other businesses, special concessions have been given to the manufacturing sector," said Bhatta, "We have removed the provision of reducing working capital loans outstanding to zero."

The remittance inflow increased by 21.2 percent and remained at Rs 1.220 trillion in the last fiscal year 2022/23, according to the NRB report.

The report on the current economic and financial situation unveiled by the Nepal Rastra Bank (NRB) showed that the remittance inflow had surged by 4.8 per cent in the fiscal year 2021/22.

Similarly, the report stated that the remittance inflow in USD increased by 12.1 percent and reached USD 9.3 billion in the last fiscal year. The increase rate was 2.2 per cent in the previous fiscal year.

Likewise, those obtaining work permits (institutional, personal/new) for foreign employment increased by 40 per cent in the last fiscal year and reached 497,000. It was increased by 392 per cent as compared to fiscal year 2021/22.

The report reads that the number of people obtaining re-approval for work permits decreased by 1.8 per cent and reached 277,272. In the fiscal year 2021/22, it had increased by 198.5 percent.

Nepal Rastra Bank (NRB) has agreed to provide a refinancing facility to hydropower projects damaged by the recent floods. After a tripartite discussion between Independent Power Producers Association, Nepal (IPPAN), Nepal Bankers Association (NBA), and the NRB on Tuesday, the central bank agreed to refinance the flood-hit hydropower projects throughout the construction period.

During the meeting, IPPAN Chairman Ganesh Karki urged the central bank for refinancing, interest capitalization, and loan restructuring for flood-damaged projects. As some of the flood-hit hydropower projects’ whose required commercial operation date (RCOD) has been exceeded are facing pressure from the bank to pay back the loans, Karki  requested the NRB for an arrangement not to stop the dividend distribution of banks even if the interest of the hydropower project is capitalized.

As per the recent directive issued by the NRB,  banks can show interest income as profit in the investments made on hydropower projects until they begin commercial operation, but such profit cannot be distributed. While restructuring such loans, banks have to do provisioning of 12.5 percent of the total loan amount. Stating that banks are reluctant to lend in hydropower projects due to this provision, IPPAN urged the central bank to allow them (banks) to distribute dividends from the profits made from interest capitalization. 

The NRB Deputy Governor Bam Bahadur Mishra said that the central bank is ready to provide refinance facilities for the flood-damaged hydropower projects throughout the reconstruction period. “The central bank is ready to facilitate the issues of interest capitalization and loan restructuring,” said Mishra. 

Mishra, however, said that the promoters should also invest some funds for the reconstruction of the flood-damaged projects, not just relying on the NRB and banks. “Whether it is by giving the right shares or through other options, the promoter must also invest some money. The rest of the amount will be provided by the central bank and commercial banks,” said Mishra. 

Mishra asked the bankers to facilitate interest capitalization and restructuring of the loans as per the addition of RCOD by the Nepal Electricity Authority. According to Mishra, the central bank will provide necessary Deputy Governor Mishra said that IPPAN should recommend the names of flood-damaged projects, based on which the central bank will provide concessions including refinance facilities. The refinancing will be given for one year, according to Mishra. 

Around three dozen hydropower projects were badly hit by the June 16-17 flood that hit Eastern Nepal. The rain and flood of June 16-17 in four districts damaged 30 hydropower projects creating a loss of Rs 8.5bn. A preliminary study carried out by the IPPAN showed that 30 hydropower projects with a combined capacity of 463 MW were damaged by the floods in Taplejung, Panchthar, Sankhuwasabha, and Bhojpur districts. 

According to IPPAN, of the 30 projects, 17 were under-construction projects. Among the projects that were already operating, the Lower Hewa Khola sustained the biggest loss. The 22.1 MW project has been the worst hit; it suffered a loss of Rs 1bn due to the flood.The IPPAN claimed that the 25 MW Kabeli B-1 Project suffered damage of Rs 500m. In terms of damage to physical infrastructure, the 4.7 MW Upper Piluwa-2 Hydropower Project has been the worst hit. 

According to the IPPAN, 17 under-construction hydropower projects with a combined capacity of 327 MW suffered losses of over Rs 2bn due to floods. Among the under-construction projects, the most damage was seen in the Super Hewa Khola Project with estimated losses of Rs 800m. 

The construction work of the Super Hewa Khola Project was 90 percent completed before the flood hit it badly. 

The monetary policy for the current fiscal (2023/24) has garnered contrasting reactions from different groups. While some have supported the policy’s intention to mitigate risk associated with stock and real estate lending, others have raised concerns over the absence of an explicit economic growth target, signaling Nepal Rastra Bank (NRB)’s shift in priorities. In the last fiscal, economic activities faced significant challenges due to a dearth of investable capital in banks, rather than high interest rates. During the period from Dec 2021 to Dec 2022, banks experienced a shortage of investable funds, leading to a contraction in loan provision and a subsequent slowdown in economic activities. The confluence of these factors placed entrepreneurs in a precarious situation, further exacerbating the economic dilemma.

Since Jan 2022, the available investable amount in banks has shown an upward trend. However, a certain degree of ambiguity persisted among banks regarding the inclusion of debentures in local-level deposits. Despite this, the demand for loans failed to escalate amid the dormant economic landscape. Consequently, loans were not extended by banks during this period.

The existing scenario suggests that banks still possess an untapped reserve of around seven percent, approximately Rs 4bn, available for investment. This amount is expected to suffice the loan demand for the next 6-7 months. Additionally, auxiliary resources from remittances and debt recovery further augment the investable capital pool. In light of these developments, the Nepal Rastra Bank (NRB) has astutely introduced a flexible monetary policy for the current fiscal, entailing a reduction in the policy rate from seven percent to 6.5 percent. This strategic move aims to ameliorate loan interest rates, as already evidenced by banks’ recent reductions.

Anticipated decrease in interest rates is likely to spur a surge in loan demand, consequently reducing operational costs for businesses. With a relatively low CD ratio, banks can source affordable funds from the NRB and invest them at favorable interest rates into loans, thereby fostering increased economic activities. As a result, entrepreneurs are poised to be more enticed to avail themselves of loans. Meeting the demand of entrepreneurs, interest rate reduction appears to be a key factor facilitated by the current monetary policy, ensuring economic continuity. Additionally, the increment of the real estate loan limit from Rs 15m to Rs 20m is likely to stimulate systematic real estate business and encourage small investors in share loans, both of which contribute positively to overall economic activities.

Furthermore, the monetary policy explicitly addresses the demands regarding working capital loan guidance, as of 2022. While these loans have not been a major issue previously, the NRB acknowledges the necessity of revising guidelines to tackle pertinent problems associated with such loans, ultimately contributing to sustained economic activities.

The introduction of the “Stressed Loan Resolution Framework” to facilitate debt restructuring for borrowers facing challenges due to natural disasters or special circumstances serves as a welcome measure. Effectively utilized, this framework can aid the recovery of affected industries and bolster overall economic viability. However, it is crucial for banks to exercise discretion and refrain from haphazardly rescheduling and restructuring loans, as such practices could engender future complications. Responsible and targeted use of this facility is advisable.

In alignment with government policies aimed at revitalizing the economy, the Nepal Rastra Bank has formulated a monetary policy to complement the budgetary initiatives. The policy focuses on promoting loans to productive sectors, continuing the provision of loans up to two crore rupees for businesses operating in Nepal, and instilling optimism in the prospects of the economy.

In a positive stride, the monitoring of major borrowers has been prioritized, seeking to prevent disproportionate allocation of bank funds and address any inquiries or doubts surrounding their utilization. NRB’s vigilance over large borrowers and the prospects of introducing a policy to extend loans to companies and businessmen with 49 percent public shares are potential measures to bridge the wealth disparity gap.

Additionally, amendments to the Banking Offenses Act are proposed to deter chaotic activities observed in the banking sector recently. Such actions are expected to ensure that perpetrators are held accountable for their actions, thereby promoting a more secure financial environment. Moreover, NRB's collaboration with relevant agencies in combating money laundering and ensuring a safer borrowing environment bodes well for the development of the financial sector.

An encouraging development is NRB’s commitment to supporting the supervision and regulation of savings and credit cooperatives. The establishment of a separate regulatory body, backed by the government and the NRB, is crucial to address the prevailing issues in the cooperative sector, furthering its stability and efficacy.

Business communities anticipate caution in expectations, emphasizing that cheaper interest rates are necessary to foster a conducive business environment, but effective implementation of existing policies is equally crucial. The market’s significant message is that relying solely on monetary policy may not be wise in the future. Instead, policy decisions should consider the broader economy rather than just market demand. To meet political and market expectations, certain flexible elements have been integrated, especially in providing support to the real estate and stock market sectors.

It appears that the NRB aims to strike a cautious balance, considering the improved liquidity situation. Stakeholders may need to adopt a more cautious approach, as no radical shift in policy regimes is expected. The NRB may revisit and revise its actions if the need arises.

The author is Deputy Director at Nepal Rastra Bank. Views expressed herein are personal

Nepal Rastra Bank (NRB) on Sunday unveiled a new monetary policy, adopting a cautious approach while addressing some of the demands of the private sector.

From the government to the private sector, all were keen to know what policy direction the new monetary policy would take. The central bank through Monetary Policy 2023/24 has tried to cater to their demands. 

The new monetary policy has reduced the risk weightage on margin lending, housing loans, and hire purchase loans. By stating that working capital loan guidelines would be reviewed, the central bank has also tried to address the other major demand of the private sector.

The new monetary arrangement has adopted policies of effective monitoring, regulation, and supervision of large loans, to reduce the over-centralization of loans, and to give priority to small and medium-productive loans. 

In the last fiscal year, the NRB had brought a monetary policy focusing on external sector stability. This time around, the central bank has focused on financial sector stability.

The NRB Governor Maha Prasad Adhikari said that the central bank introduced the issue of increasing monitoring of large and bulk loans by taking into account the misuse of loans taken by large borrowers. Adhikari also said that the central bank is trying to give the main priority to small borrowers.

As per the new monetary policy, the asset quality of commercial banks will be re-evaluated. In addition, guidelines for internal credit risk classification of banks and financial institutions will be formulated and implemented. Even the national-level development banks will have to maintain capital funds as per the Capital Adequacy Framework 2015.

But it has taken a conservative approach when it comes to private-sector credit. The NRB has targeted private sector credit growth to 11.5 percent in FY 2023/24 whereas it was 12.6 percent in FY 2022/23. This means the central bank is still stringent when it comes to credit expansion to the private sector. Despite improvement in the country’s external sector, the central bank has made it clear that risks persist in the country’s financial sector and that the easy availability of credit could again lead to a situation of a surge in imports and depletion of forex reserves.

The central bank has said separate guidelines will be issued to make the supervision of large creditors effective. Given the over-concentration of banks and financial institutions’ (BFIs) credit to certain groups, the monetary policy has said that it would prioritize reducing the concentration of credit by amending the arrangements related to single-customer credit facilities.

The central bank has said that a macro stress testing framework would be implemented to evaluate the quality of assets in the banking sector, to reduce credit risk, and to develop and use supervisory information systems to enhance supervisory capacity.

The NRB has reduced the policy rate, which is the upper point of the interest rate corridor, by keeping the bank rate unchanged through monetary policy. This will contribute to reducing the interest rate.

The NRB has made it clear that the risk weightage of margin loans up to Rs 5m has been reduced from 150 percent to 100 percent. However, the risk weightage of margin loans above Rs 5 million will remain as earlier i.e., 150 percent. Similarly, the NRB has said that the risk weightage of hire purchase loans up to Rs 2.5m has been reduced to 100 percent from earlier 150 percent. The reduction in risk weightage of margin loans, and hire purchase loans is expected to provide relief to stock investors and the automobile sector. 

The central bank has increased the housing loan limit by Rs 5 million. Earlier, it had set a limit of Rs 15m for residential house loans which now has been increased to Rs 20m. Similarly, the risk weighting of loans to those who are constructing residential houses through government-licensed companies has been reduced from 150 percent to 100 percent. 

The NRB has said it is going to restructure the loans of borrowers who are in trouble due to natural disasters or other special circumstances by issuing a ‘Stressed Loan Resolution Framework’. The private sector power producers have been seeking some kind of support from the government after the recent flood damaged more than two dozen hydropower projects. 

With the improvement in the country’s foreign exchange reserves, the central bank increased the limit of international payment amounts. As per the new monetary policy, air service providers can pay up to $100,000  abroad at a time with effect from the new fiscal year. 

The central bank has also increased the foreign exchange limit for Nepalis traveling abroad from existing $1,500 to $2,500. The NRB reduced the foreign exchange limit to $1,500 in Nov 2018. 

Amid increasing instances of unprofessional activities under the guise of agitation against the banks and financial institutions, the NRB in a new monetary policy said that the existing Banking Offense Act will be amended. 

“We have also introduced a monetary policy to increase credit to the productive and private sectors. We have also made loans related to auto, real estate, and stock trading flexible. Overall, monetary policy has adopted flexibility to keep the economy moving,” said Bam Bahadur Mishra, deputy governor of the NRB. 

Banker Manoj Gyawali said that the new monetary policy was not expected to bring about any major policy changes. “It seems that the NRB does not want to be more flexible because the liquidity situation has eased while some of the problems have been resolved through the third quarter review of last year’s monetary policy,” said Gyawali who is Deputy CEO of Nabil Bank.

“It looks like the monetary policy aims to encourage the flow of credit toward the productive sector. While it is also imperative to increase the economic growth rate, there is no demand for credit toward the productive sector to achieve the economic growth target due to the current situation,” said Gyawali.

Nepal Rastra Bank is to issue digital currency.

Making public the monetary policy for the fiscal year 2023/24, the central bank said that further works will be carried out on the basis of the study conducted on the issue of digital currency.

Likewise, it is mentioned in the monetary policy to facilitate the collection of revenue by using electronic payment devices in the main offices where public services are provided.

Nepal Rastra Bank (NRB) has made public the monetary policy for the fiscal year 2023/24.

The central bank through the policy has dropped the policy rate, and kept intact the mandatory cash ratio and the statutory liquidity ratio of banks and financial institutions.

Similarly, the bank rate has remained unchanged, and the bidding rate in deposit collection has been decreased.

In view of the internal and external economic scenario, the policy rate has reduced 50 base points to 6.5 percent. The bank rate has been kept intact at 7.5 percent while the bidding rate in deposit collection has dropped to 4.5 percent from 5.5 percent.

The secondary market transaction and the bidding in the deposit collection will remain open if the weighted interbank interest rate considered the operation target by the Rastra Bank is higher than the bank rate and lower than the deposit collection rate.

Similarly, the provision of the permanent liquidity facility in the bank rate and the overnight liquidity facility in the policy rate has been kept unchanged.

There will be a provision of providing the permanent deposit collection at the lower limit of the interest rate corridor for making the interest rate corridor effective, according to the central bank.

With the country’s banking system flushed with liquidity, Nepal Rastra Bank (NRB) is conducting a reverse repo worth Rs 20bn to mop up excess liquidity in the market.

A reverse repo is a monetary mechanism through which the central bank absorbs additional liquidity of the banking system by paying certain interest rates.

Issuing a notice, the NRB has said that it is going to mop up Rs 20bn for July 25 (for a period of 14 days). The central bank is conducting the reverse repo for the third time within Ashad.

With the end of the current fiscal approaching, there has been a huge surge in government payments, which ultimately comes to the banking system. With demands for loans drying up, investable capital has been piling up in the banking system in recent days. As of July 9,  investable capital worth Rs 440bn has been accumulated in banks and financial institutions (BFIs). The deposits of BFIs amounted to Rs 5,715bn, while loans totaled Rs 4,861bn.

Since Baisakh, the banking system has collected Rs 242bn in deposits. In the first three weeks of Ashad (the last month of the fiscal year), Rs 147bn in deposits have been added to the banking system.

With the liquidity position becoming easier, the interbank interest rate has also decreased. The interbank interest rate has come down from seven percent during the review period to 1.36 percent on July 9.

The BFIs that were experiencing a liquidity crunch until a few months ago are now facing problems of non-disbursement of loans. While liquidity is increasing, bankers say demands for loans have remained low.

While the commercial banks introduced a new home loan scheme by reducing the interest with the expectation that the construction sector will be energized, they are seeing no demand for loans.

As there is no demand for loans currently, the CD ratio of commercial banks has been continuously decreasing. The CD ratio which was 88.07 percent in mid-July, 2022, has fallen to 82.03 percent on July 24, 2023.

As per central bank regulatory norms, banks can disburse 90 percent of their deposits in loans. Banks have to maintain the credit-to-deposit ratio (CD ratio) at 90 percent.

As the government also spends in the last quarter massively, a large amount of cash is being deposited in banks in the period. BFIs generally make little lending during the last quarter of the fiscal year.

The credit expansion to the private sector in the first 11 months of the current fiscal year is far less than what the BFIs lent during the same period last fiscal year. Bankers say lending will not grow much in Ashad, the last month of the fiscal year, in which BFIs will be more focused on loan recovery.

According to bankers, the private sector has not sought bank loans with the deepening economic downturn. On the other hand, retail loans such as housing loans and auto loans have not grown with interest rates still remaining high. While the BFIs have been gradually lowering the loan interest rates, te demand for loans has not surged as expected. “The demands for loans have remained subdued due to the state of the economy and businesses,” said a banker.

Bankers say the other reason behind the sluggish lending is banks have become more cautious in loan disbursement due to a sharp rise in non-performing loans (NPLs).