Monetary Policy for the fiscal year 2077/78 unveiled today; highlights with full text

The much-awaited monetary policy for the fiscal year 2077/ 78 has been unveiled today at 3 p.m. The policy was publicly unveiled by NRB Governor Maha Prasad Adhikari via Nepal TV live.

The monetary policy is highly expected to revamp the collapsing economy because of the Covid-19 pandemic. The policy was approved in the meeting of the board of directors of Nepal Rastra Bank this morning.

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.

The new monetary policy has increased the Credit to Core Capital plus Deposit Ratio (CCD Ratio) from 80% to 85%. In simpler words, this means that banks are allowed to issue more amount as loans and advances, and can now put 5% less amount as a reserve to maintain liquidity.

Also, the policy has extended the period of loan repayment for entrepreneurs and business owners who were affected by the pandemic and the lockdown. Loan moratorium is extended by 6 months for the less affected, 9 months for the mildly affected, and 12 months for the most affected customers. 

While most had anticipated that this policy would extend the moratorium for a maximum of 2 years, such provision hasn't been made. The sector that is affected the most will get a maximum of 1 additional year to repay their loans. 

Additionally, margin lending has been increased to 70%. Until now, it was maintained at 65%. Also, 120 days average price will be taken in to consideration instead of 180 days while disbursing loan on this product. 

The monetary policy has now made it impossible to obtain a microfinance license. This is likely done because the microfinance sector in Nepal is already saturated. Also, any microfinance license under the process of issuance has been abandoned.

The monetary policy has said that in view of the economic impact caused by the Covid-19 pandemic, liquidity will be eased and credit balance will be shifted.

The following provisions are being implemented to do so:

Projection of the 2077/ 78 fiscal year scenario

1) Annual Growth Rate target set at 7%.

2) Aim to limit consumer inflation no higher than 7%.

3) A permanent liquidity facility rate of 5% will be maintained as the upper limit of the interest rate corridor.

4) Deposit collection rate, which has been established as the lower limit of the corridor will be reduced from 2% to 1%.

5) The Repo Rate has been reduced from 3.5% to 3%.

6) Long-term Repo service will be made available to improve much-needed liquidity for financial rehabilitation.

7) The Mandatory cash ratio of 3 percent to be maintained by banks and financial institutions is kept intact.

8) The statutory liquidity ratio to be maintained by commercial banks of 10 percent, while that of development banks of 8 percent Percent and the finance company of 7 percent have been kept intact.

9) The lender of last resort rate has been kept intact at 5%.

10) Commercial banks will have to issue at least 15% of their loans in the agriculture sector by 2080 Ashadh end.

11) Agriculture Development Bank will be established as a "Lead Bank" in the agriculture sector. It can also issue Agriculture Bonds to ensure long-term availability of resources.

12) Inter-bank transactions of Agriculture Credit Swaps will be further simplified.

13) Commercial banks will have to issue at least 10% of their loans in the energy sector by 2081 Ashadh end.

14) Commercial Banks experienced in the energy sector will be allowed to issue Energy Bonds.

15) CCD Ratio has been increased from 80% to 85%.

16) BFi's with a distributable profit lower than 5% of their paid-up capital, the distribution of cash dividend will be forbidden.

17) BFI's with a distributable profit higher than 5% of their paid-up capital will be allowed to distribute 30% of dividends as cash dividend in maximum.

18) However, companies that satisfy the criteria in point 17 can't distribute cash dividend that amounts to a larger sum than their Deposit Weighted Average maintained in Ashadh 2077.

Monetary Policy FULL TEXT