Plan aims to ensure financial stability
KATHMANDU, JUL 26 -
Nepal Rastra Bank (NRB) on Wednesday unveiled the monetary policy for the fiscal year 2012-13. The policy has laid high emphasis on increasing lending in the productive sector, financial inclusion and healthy financial system. It has also liberalised foreign exchange-related provisions. However, the policy hardly speaks of real estate and share market.
Unveiling the policy, NRB Governor Yuaraj Khatiwada said the policy concentrates on ensuring financial stability, expanding access to finance, helping achieve economic growth of 5.5 percent and controlling inflation.
In order to expand credits to the productive sector, the policy has reduced interest rates of refinancing it provides to banks and financial institutions (BFIs) to 6 percent from the current 6.5 percent in the agriculture and hydropower and 7 percent in other productive sectors. “In turn, the BFIs will have to re-lend the amount at not more than 9 percent,” the policy says.
The central bank has also made a provision whereby BFIs must maintain a ‘base rate’ of interest by using the method fixed by the central bank. The BFIs will have to determine their interest rates on the basis of the base rate. This is expected to reduce the interest rate gap between deposit and credit. BFIs will have to publish such base rates on a regular basis, the policy says.
Khatiwada said the move has been taken to make the interest rate transparent and competitive. Although the much expected interest rate corridor was not introduced immediately, the central bank said it will implement the system gradually.
The central bank also increased the bank rate to 8 percent from the now 7 percent. The bank will provide refinancing as per the lender of last resort and standing liquidity at this rate. Practically, the rate is lower compared to last year as the NRB used to charge 3 percent extra in bank rate for refinancing and 3 percent extra from the interest rate of 91-day treasury bills, which has now been removed.
The NRB increased the cash reserve ratio (CRR) for commercial banks and development banks by 1 and 0.5 percentage points to 6 and 5.5 percent respectively, while the CRR maintained for finance companies remains unchanged at 5 percent. Last year, there was a single CRR rate for all A, B and C class BFIs.
The central bank has also increased the deprived sector lending for BFIs. Now, commercial banks, development banks and finance companies must lend 4 percent, 3.5 percent and 3 percent respectively of their total loan portfolio. “It is the continuation of last year’s policy of gradually increasing the limit to 5 percent,” said Khatiwada.
To meet its objective of increasing access to finance, the central bank has increased the limit of collateral free loans that a group can take from BFIs to Rs 100,000 for each member. They can get up to Rs 300,000 by putting a collateral too.
To maintain financial stability, the central bank has strengthened the provision of prompt corrective action (PCA). Now, it will also take PCA against BFIs that fail to maintain adequate liquidity and keep the non-performing loans below a certain level. So far, the central bank has been implementing the PCA provision on BFIs that fail to maintain the required level of capital adequacy ratio.
The NRB also said it will establish a Financial Stability Unit to regularly study and monitor the status and challenges facing the financial sector. The policy also announced implementation of stress testing guidelines prepared by the NRB in both commercial banks and other financial institutions having deposits over Rs 2 billion.
The central bank increased the limit of insurance coverage for individual deposits to Rs 300,000 from the current limit of Rs 200,000. To assist the government in its efforts to increase tax compliance, the monetary policy says that only firms holding the Permanent Account Number (PAN) can take loans from BFIs while getting loans above certain amount.
The new monetary policy has continued the moratorium in new licensing in BFIs. However, it has made it clear that it will not implement this provision if approval is sought for establishment of special institutions focused on agriculture, energy and physical infrastructure. Besides making mergers more effective, the central bank also said it will make efforts to introduce policies on acquisition.
As the Nepali banking system has an abundance of liquidity and foreign exchange reserve, the NRB has opened doors for commercial banks to invest up to 30 percent of their deposits in foreign banks, in call deposits, certificate of deposits and other instruments with low risks for two years. “As the Nepali financial system is also becoming part of a global financial hub, we have been flexible in this regard,” said the governor.
The NRB has further removed the maximum limit of foreign exchange availability against a passport for a year, while allowing people to get up to $2,500 at a time. “It means a passport holder can get up to $2500 at a time, irrespective of the frequency of travel,” said a senior NRB official. People travelling abroad for various purposes such as medical and other purposes will get up to $10,000 from the existing provision of $6,000. Those importing goods from third countries other than India through draft/TT will get up to $30,000 at a time, up from the $25,000 earlier, according to the new monetary policy.
Nepalis having foreign currency deposits will now be able to utilize up to $5,000 from their accounts in foreign currency without going to the central bank for approval. “The move was taken to attract more people to open foreign currency deposit accounts,” said Khatiwada.
Bankers’ take
Sashin Joshi CEO, NIC Bank
This is a tight monetary policy. By increasing the cash reserve ratio (CRR) by 1 percent, the central bank will absorb around Rs 10 billion from commercial banks. Similarly, around Rs 5 billion will go to the deprived sector lending. Nevertheless, the policy attempts to enforce macro financial prudential which is a welcome move.
Upendra Poudel CEO, NMB Bank
The policy has identified problems in the banking sector. It has identified high interest rate as the major reason for low industrial activity. However, it fails to identify policies to solve the problem. Also, the policy directs banks to compulsorily lend in some areas and sectors. In my opinion, the central bank should not engage commercial banks in such directed lending.
Rajendra Man Shakya President, Finance Companies’ Association
We were expecting relief packages through the policy, but that did not happen. We are having problems in loan recovery and non-performing loans are likely to increase. The policy fails to address such problems.
Source: The Kathmandu Post
