Liquidity management main thrust of monetary policy

KATHMANDU, July 18 : Plagued by excess cash that has flushed the banking system, Nepal Rastra Bank (NRB) has come up with slew of measures and policies to manage liquidity surplus.

Unveiling the Monetary Policy for fiscal year 2014/15, NRB Governor Yuba Raj Khatiwada said the monetary policy has been tightened keeping in view the possible risks that liquidity surplus could pose in inflation as well as on and financial and external stability of the country.

Tightening of monetary policy refers to the course of action that the central bank adopts to control the flow of money and curb inflation when it is rising too fast.



Nepal Rastra Bank Governor Yuba Raj Khatiwada (left) talks about the Monetary Policy for Fiscal Year 2014/15 at its unveiling at the NRB Head Office, in Baluwatar, Kathmandu, on Friday.(Dipesh Shrestha/Republica)

NRB has increased the cash reserve ratio (CRR) requirement for the commercial banks and development banks to 6 and 5 percent, respectively. The central bank, however, kept CRR for the finance companies unchanged. Earlier, commercial banks, development banks and finance companies were required to maintain the CRR of 5 percent, 4.5 percent and 4 percent, respectively.

The new reserve norms mean more amounts of loan-able cash or deposit of the commercial and development banks would be stored in the central bank´s vault.

Likewise, NRB has said it can bring ´Fine Tuning Operation (FTO)´ as an emergency measure to manage liquidity of BFIs anytime if it poses the risk to financial stability or creates short-term interest rates volatility.

The central bank has also tightened flow of credit to the secondary market. “Earlier, we had left the lending decision on loan against shares on BFIs on their own risk and analysis of the market. Now, we have felt that the provision is too loose,” Khatiwada said, adding, “That is why we decided that such lending should be made on the basis of market price of shares.”

Upendra Poudyal, vice president of Nepal Bankers´ Association (NBA), said the monetary policy is conceptually fine as its thrust is on liquidity management. “However, we will have to see how it will be implemented,” he added.

Similarly, Krishna Raj Lamichhane, president of Development Bankers Association of Nepal, also said overall monetary policy was balanced.

ONLY TWO TERMS FOR CHAIRMAN, CEO AND DIRECTOR
The central bank has barred chairmen, CEOs and board directors of BFIs from holding more than two consecutive terms. Once this provision is implemented, chairman, CEO and board directors of BFI can be elected, appointed or nominated to their respective posts only for two consecutive terms.

According to Khatiwada, the incumbent executives, director or chairman´s current tenure would be counted as the first term.

Bankers, however, are unhappy with the provision. “Banks can retain its CEO as long as s/he performs well or the board of directors (BoD) and bank´s executive could be compatible with each other. So, this provision may not be practical,” said Poudyal.

ENCOURAGEMENT TO INCREASE LOANS TO SME

In line with the budget unveiled by the government, the central bank has encouraged BFIs to increase lending to small and medium enterprises (SMEs). “The provisions would be introduced to make loan security or insurance more flexible and effective by offering more discounts on limit, security fee and loan provisioning for these lending,” reads the Monetary Policy.

Through the budget, the government has said that it would create a ´start-up fund´ to encourage lending to small and medium investors and entrepreneurs with innovative ideas, but lack the fund to kick-start the projects. “Arrangements would be made to provide loans to those entrepreneurs,” the monetary policy states.

-- CRR for commercial banks raised by 1 percentage point
-- Commercial banks allowed to invest up to 40% percent of forex reserve on secured instruments
-- Private sector lending projected to increase by 18%
-- Refinancing rate for agro, hydro, fishery and other productive sector loans brought down to 4%
-- NRB may provide refinance facility to the commercial banks for agricultural loans as envisioned in budget
-- Inflation rate projected at 8 percent

Source: Republica