Every year, after releasing a budget along with a finance act by the government, Nepal Rastra Bank (the Central bank of Nepal) announces monetary policy outlining various initiatives to strengthen the economic aspects of the country. NRB announced Monetary policy 2077/78 on 17th July 2020. The policy of this year was published and announced with a detailed response to the unprecedented economic crisis caused by COVID-19 due to which economic growth of the fiscal year 2076/77 has gone down to 2.3% against the target of 8.2%. The policy has certainly been perceived as a progressive one and focuses on the much required relief to the affected industries and sectors. Here are the detailed highlights of the policy:
- Economic growth
NRB has targeted to achieve economic growth of 7% by the end of 2021 A.D. The expressed focus is on economic stability and implied on economic growth. Previous monetary policy had targeted economic growth of 8.50%, but it only gained 2.3% of economic growth due to unavoidable circumstances and various other factors.
2. Provisions relating to banking obligations
The banks are required to invest at least 15% of their total loan portfolio in the agricultural sector and 10% in the energy sector. In addition to national investment, this provision has created a platform for foreign investors to invest more in the agriculture and energy sector. With an intent to provide relief to the capital market, the limit of share pledge loan has been increased by 5% making it up to 70%. BFIs can declare and distribute cash dividends only up to 30% of the net distributable profit of the previous fiscal year. The time limitation for commercial banks to issue at 25% debenture( of their paid-up capital) was Ashad end 2077B.S. However, it has been extended to Ashad end 2079 B.S. Microfinance institutions, however, are restricted to make deposits other than long term investment in banks for more than 3 months.
3. Small and medium-sized enterprise
The policy has mixed reactions from small and medium-sized industries (SMEs). Banks are made liable to issue energy bond refinancing loan facility for Small and medium-sized enterprises (SMEs) at 2%
4. Loan instalment and interest payment
Considering the after effects of COVID-19 in individual and institutional level, the policy has provided facility of extending loan instalment and interest payment till mid-December. Moratorium (i.e. a legal authorization to debtors to postpone payments) on loan, interest rate recovery has also been extended till mid-July for severely affected industries, mid- April for partially affected industries and mid-January to industries that have limited effects. The central bank has given a two years time period to clear loans and interests for the industry or projects that could not be completed within the grace period due to the pandemic.
5. Merger of banks and financial institutions
Unlike monetary policy of 2076/77 (2019/20), the current policy has encouraged merger among BFIs but has not penned down anything on forced merger. However, the merged entities are granted the privilege of collecting 10 per cent more corporate deposits than the fixed capital. They shall also be given a discount of o.5 % and 1% in mandatory cash ratio and statutory liquidity ratio respectively.
6. Core capital plus deposit ratio (CCD Ratio)
The CCD ratio has been raised from 80%to 85% , that means the banks are allowed to issue the loans and advances upto 85%. This boosts BFIs capacity to invest.
7. Pause on issuance of license for new financial institutions
The issuance of licenses for new financial institutions/ micro finance institutions has been halted for the time being. Issuance of licence to new digital payment service providers is also halted. PSP license will be revoked if the customer base is lower than 300,000 by Ashad 2078 and the average number of monthly transactions do not reach at least 600,000.
8. COVID-19 responses
The monetary policy has a thorough consideration of the effects of COVI-19. Banks and Financial Institutions (BFIs) shall have to provide inter-bank ATM cash withdrawal free of charge till COVID-19 crisis is over. The policy has promoted loan disbursement in sectors that are mostly hit by the crisis, especially agriculture, energy, tourism and small and medium enterprises. In an attempt to revive the sectors that were thundered by pandemic, the central bank has made it compulsory for banks to disburse subsidised loans at 5%. It has also decided to review the salary/facilities of bankers and cut their allowances. The size of the refinancing fund is fixed at 100 billion expanding the scope to diverse sectors.
9. Disbursement of subsidized loans
Commercial banks: Commercial banks shall disburse subsidized loans to at least 500 borrowers or at least 10 such loans per bank branch whichever is more.
Development banks: Development banks must disburse subsidised loans to at least 300 borrowers or at least to five borrowers per bank branch, whichever is more.
10. Service fees
BFIs are restricted to charge a heavy service charge on the borrowers. 0.75% and 0.25% service charge has been set for commercial banks and financial institutions / developmental banks respectively.
Detailed comparison of Monetary policy 2076/77 and 2077/78
|Bases||Monetary policy 2076/77||Monetary policy 2077/28|
|Economic growth||The target was 8.5%. However, the actual economic growth rate stayed at 2.3%||The target is 7.1%|
|Investment of banks||Agricultural and energy sector was not prioritised as such for the purpose of investment by banks.||Increment in investment in banks esp in agriculture and energy sector by 15% and 10% respectively.|
|The interest of microfinance companies||The interest rate that could be charged by microfinance companies would be regulated by the specific Law on microfinance.||Fixed at flat 15%. They cannot charge more than that.|
|Amount of refinancing||100 billion.||The amount of refinancing is static. i.e. 100 billion. However, the scope has been further extended to rural areas of the country.|
|Additional charge||There was no existence of such provisions.||Banks are restricted to charge an additional amount for using the ATM lounge of other banks.|
|Inflation rate||Targeted to keep the inflation rate at 6%. It stayed at 6.28%.||Targeted to keep the inflation rate at 7%.|
|Average money supply||18%||18%|
|Cash reserve ratio||Cash Reserve Ratio (CRR) for Banks and Financial Institution (BFI) shall be maintained at 4%.||Cash Reserve Ratio (CRR) for BFIs to be maintained at 3%.|
|Statutory Liquidity Ratio (SLR)||Statutory Liquidity Ratio (SLR) is to be maintained at 10%, 8% and 7% by Class A, B and C BFIs, respectively.||Statutory Liquidity Ratio (SLR) is to be maintained at 10%, 8% and 7% by Class A, B and C BFIs, respectively.|
|Bank rate applied for the purpose of Lender of Last Resort (LOLR) facility||6%||5%|
|Core capital plus deposit ratio (CCD Ratio)||80%||85%|
|Payment system||To strengthen the payment system RTGS payment system was introduced and procedures for installing the Cash Deposit Machine (CDM) for depositing the cash in BFIs was developed.||Though financial transactions through digital means are encouraged, issuance of new licenses to payment service operators and payment service institutions is suspended.|
|Time limitation for issuance of debenture||The time limitation for commercial banks to issue 25% debenture( of their paid-up capital) is Ashad end 2077B.S||The time limitation for commercial banks to issue at 25% debenture( of their paid-up capital) is extended till Ashad end 2079 B.S|