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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).