Comparative Synopsis of Monetary policy for the fiscal year 2074/75 and 2075/76; things that have changed and things that remain the same

-Aakriti Thakali

The monetary policy for this fiscal year was publicly announced yesterday and evidently “the big merger” was not the concern of NRB. Despite the fact that a lot of personnel had mentioned that the BFIs of Nepal need further consolidation, the only provision introduced in this sector was Merger and Acquisitions will be promoted and encouraged.

Aside from this, the policy has introduced changes in various rates like Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR) and Standing Liquidity Facility (SLF). These rates will be applicable to the BFIs of all level, subsequently affecting other market rates like interest on deposits and lending.

The following table shows the comparative view of important figures:

Economic Growth Target:

Since the Monetary Policy is prepared keeping Budget Policy in view, the target growth rate and inflation rate is directly derived from that. Comparing to the last fiscal year’s policy, this year the target growth rate has increased whereas the target inflation is decreased. However by general rule of thumb if we aspire to achieve higher growth rate the inflation is also going to increase. NRB is going to have a real challenge in this field and achievement of both these targets will be a real achievement.

SLF, SLR, CRR:

Standing Liquidity Facility (SLF) is a facility through which banks can face liquidity pressure by borrowing money from the NRB at a repurchase agreement which an aim to maintain basic stability in the country’s financial market. Similarly Statutory Liquidity Ratio (SLR) is the requirement under which banks need to invest on government approved securities or gold against the total amount of credit they are lending. The Banks can earn interest on these liquid assets. Then Cash Reserve Ratio (CRR) is the minimum percentage of total deposits that banks have to either hold in cash or as deposits in NRB, where they can’t earn any interest.

As you can see from the table above, all three of these rates along with the Lender of the Last Resort (LOLR) has been decreased. This shows that the central bank is going for expansionary policy this year. So the current liquidity shortage will certainly be eased by this leniency.

Refinance rates:

We can see that the refinance rates have been kept unchanged for both general and special purpose. However we can rise in the refinance fund and as mentioned in the policy this fund will be used by giving more priority to the productive sector. This certainly will help in improving the country’s GDP.

Percentage of Loan to priority sector:

The overall percentage remains constant at 25%, however this year no specific segregation has been made unlike last year. The agriculture sector is assigned 10% of the total loan disbursed by the commercial bank and rest for the remaining productive sectors. This year Vehicles used for public transportation that consume renewable energy like LPG, electricity and solar power has also been added to the priority sector. The given percentage remains same for development banks and finance companies.

Similarly the percentage of total loan to be allocated for deprived sectors also remains same.

Overdraft and revolving credit limit:

The maximum limit for overdraft and revolving credit limit has shrunk from Rs 75 lakh to Rs 50 lakh this year.

Interest spread:

The interest spread of any BFI is the difference between its lending rates and borrowing rates, which essentially determines its interest income. The maximum spread that was fixed at 5% last year has been decreased to 4.5% this year and as per the policy, this rate will be continuously decreased in the years to come.

 As far as the macro prudential regulation is concerned not much changes were made. Nepal is now entering into the Basel III framework and the requirements of the BFIs will be maintained in the same framework, which reduces the work of identifying each item separately. In addition to this, the National Financial Reporting Standard (NFRS) will be implemented to all BFIs from this fiscal year, which previously was limited to commercial banks. This will bring uniformity in financial reports and ensure transparency.

However we can see changes in the last two items. The total margin loan that a BFI can disburse was set at 40% of its core capital, which now has been decreased to 25% of the core capital. Similarly the maximum deposit that can be collected from a single institution has also been decreased to 15% which was previously 20%.

Microfinance Companies (Laghubitta Bittiya Sanstha)

In this year’s monetary policy, a separate section has been specified for regulations related to Microfinance companies. The major points are:

1. Microfinance companies are also allowed to bring in foreign loan worth 25% of its core capital.
2. Microfinance companies will be included under the Credit Information Bureau (CIB) where they have to submit periodic report for all credits floated. In case the company fails to submit report, an additional 2% loan loss provision should be created.
3. No new Microfinance Companies will be provided license considering the fact that there are already too many.
4. NRB to formulate necessary policies to encourage merger and acquisition.
5. Microfinance companies can add extra 6% to the cost of fund while lending.

Also read:

Monetary Policy 2075/76; things we should be aware of and expect from NRB apart from banks’ merger & acquisition

Monetary Policy for fiscal year 2075/76 unveils today; Major updates

Monetary Policy of FY 2075/76 Released (Read full version)