MONETARY POLICY 2023/024: Relief To Share Market

Avoiding unnecessary pressure from business group, Nepal Rastra Bank governor Maha Prasad Adhikari finally has unveiled a New Monetary Policy. Although it provides certain relief to share market and real states, the policy has not compromised on financial stability and disciplne

Aug. 6, 2023, 12:21 p.m. Published in Magazine Issue: VOL. 17, No. 02, August.04,2023 (Shrawan,21. 2080) Publisher and Editor: Keshab Prasad Poudel Online Register Number: DOI 584/074-75

Nepal Rastra Bank has recently unveiled the monetary policy for the financial year 2080/81, aimed at fostering economic growth and stability in the country. The policy measures have been carefully crafted to align with the government's financial policy and address various sectors of the economy.

Interest Rate and Inflation Control:

The policy rate has been reduced by 50 basis points to 6.5 percent, aiming to encourage borrowing and investment in the economy. Furthermore, efforts will be made to manage monetary expansion in a way that keeps inflation within 6.5 percent, thereby preventing undue price pressures.

Strengthening the Financial Sector:

To bolster the financial sector's resilience and efficiency, the Nepal Rastra Bank will review existing lending arrangements and develop guidelines for the internal credit risk classification of banks and financial institutions. Additionally, a separate regulatory body will be formed to oversee savings and credit cooperatives, ensuring effective oversight and promoting financial stability.

Encouraging Home Ownership and International Travel:

To support the real estate market, the first residential home loan limit has been increased from Rs 1.5 crore to Rs 2 crore, making it easier for citizens to invest in their own homes. For Nepalis traveling abroad, a facility of up to 2,500 dollars will be provided when traveling to countries other than India, upon showing their passports.

Foreign Currency Loans and Electronic Payments:

Loans taken in foreign currency can no longer be paid in Nepali currency, removing the previous provision. This step is aimed at enhancing currency stability and minimizing foreign exchange risks. The monetary policy also emphasizes the adoption of electronic payment systems to facilitate smooth and secure revenue transactions.

Supporting Borrowers Affected by Natural Disasters:

In response to the challenges posed by natural disasters, Nepal Rastra Bank will implement special arrangements to rehabilitate borrowers facing difficulties. Loan restructuring and other measures will be employed to help impacted borrowers recover and reestablish their businesses.

Promoting Domestic Production:

The monetary policy prioritizes increasing domestic production capacity by channeling financial resources into productive sectors. Regulatory policies will be tailored to facilitate effective monitoring and supervision of large loans, reduce over-centralization of credit, and give priority to small and medium productive loans, thus promoting financial stability and accessibility.

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Conclusion:

The 2080/81 monetary policy has been thoughtfully crafted to boost economic growth, maintain price stability, and ensure the stability of the external sector in Nepal. By taking proactive measures and implementing targeted policies, Nepal Rastra Bank aims to support various sectors of the economy, benefitting businesses, consumers, and employees alike. The monetary policy will play a crucial role in strengthening the payment system and fostering overall financial stability in the country.

Bank Rate Unchanged, Focus on Economic Growth and Stability

The Nepal Rastra Bank (NRB) has recently unveiled the monetary policy for the fiscal year 2023/24, aiming to maintain economic growth and stability. While the policy rate has been reduced by 50 basis points to 6.5 percent, the bank rate remains unchanged at 7.5 percent. Additionally, the deposit collection action rate has been reduced from 5.5 percent to 4.5 percent.

The NRB will maintain a standing liquidity facility at the bank rate and an overnight liquidity facility at the policy rate. Moreover, the interest rate corridor will be made effective by providing fixed deposit collection facilities at the lower limit of the corridor.

To achieve sustainable high economic growth while maintaining price and external sector stability, the monetary policy prioritizes mobilizing financial resources in sectors that contribute to capital creation and production capacity. The goal is to keep inflation within 6.5 percent, ensuring that monetary expansion does not exert undue pressure on prices.

The NRB aims to increase broad money supply by 12.5 percent and credit to the private sector by 11.5 percent in the fiscal year 2023/24. By channeling financial resources to the productive sector, the NRB seeks to achieve the government's target of 6 percent economic growth.

To maintain financial sector stability, the Banking Offense and Punishment Act 2064 will be amended to address non-commercial and disorderly activities that may affect the sector's stability. Additionally, measures to prevent money laundering will be implemented based on mutual evaluation suggestions, and the use of modern equipment and technology will be encouraged to promote electronic payments.

The NRB will provide special arrangements for borrowers facing difficulties due to natural disasters or other exceptional circumstances. Guidelines for asset quality review and internal credit risk classification will be formulated and implemented to enhance the financial sector's resilience.

The monetary policy sets seven targets, including maintaining foreign exchange reserves sufficient to cover imports for at least seven months, keeping interbank interest rates within the interest corridor, and limiting inflation to 6.5 percent.

By adopting these measures, the NRB aims to foster economic growth and stability, ensuring a favorable environment for businesses and consumers alike.

The NRB reduced the policy rate keeping the bank rate unchanged at 7.5 per cent.

While unveiling the monetary policy for the fiscal year 2023/24, the NRB has announced that the policy rate has been reduced by 50 basis points to 6.5 per cent in view of the internal and external economic scenario.

Similarly, while keeping the bank rate unchanged at 7.5 per cent, the deposit collection action rate has been reduced from 5.5 per cent to 4.5 per cent, according to the NRB.

If the weighted average inter-bank interest rate taken by the NRB as an operational target is higher than the bank rate and lower than the deposit collection rate, the secondary market transaction and deposit collection will be opened.

According to the NRB, the provision of a standing liquidity facility at the bank rate and overnight liquidity facility at the policy rate has been maintained.

In order to make the interest rate corridor effective, arrangements will be made to provide fixed deposit collection facilities at the lower limit of the interest rate corridor, according to the NRB.

The mandatory cash reserve ratio and statutory liquidity ratio have been kept unchanged.

Focus on productive sector loan

It seems that the growth rate of the potential production capacity of Nepal is around 4.5 per cent.

According to a study conducted by NRB, if the inflation in Nepal remains above 6.5 per cent, it is supposed that it will adversely affect economic growth.

Therefore, to achieve high economic growth sustainably while maintaining price and external sector stability, the policy of increasing production capacity by mobilising financial resources in the areas where capital is created has been prioritised, said Adhikari.

The NRB has stated that the weighted average interest rate of inter-bank transactions of banks and financial institutions has been kept unchanged as the operating target.

The monetary policy has proposed that the policy rate will be determined based on the ability of the foreign exchange reserves to support imports and the annual target inflation.

The goal of monetary policy is to maintain foreign exchange reserves to cover goods and services imports at least for seven months, said the NRB.

In order to keep the inflation within 6.5 per cent, monetary management will be done in such a way that monetary expansion does not put pressure on the prices.

As targeted by the budget statement of the government for the fiscal year 2023/24, the priority is to channel the financial resources towards the productive sector in order to help achieve an economic growth of 6 per cent.

Broad money supply to rise by 12%

In the fiscal year 2023/24, growth rate of broad money supply is projected to be 12.5 per cent and the credit from banks and financial institutions to the private sector is expected to be 11.5 per cent.

Broad money supply was projected to expand by 12 per cent and credit to the private sector by 12.6 per cent in the last fiscal year. Due to the interest rate hikes, the private sector credit could not expand as per the target.

In the last 20 years, credit has expanded by an average of 19.4 per cent from the banking sector.

In addition to the increase in the average ratio between the loans flowing to the private sector and the gross domestic product, the number of large loans has also increased. However, the real sector has not been able to expand in accordance with the expansion of credit.

When the real sector expands, not financial sector alone, there is a risk that the quality of financial assets will weaken and not only affect financial stability, but it will ultimately have an adverse effect on the real sector and government finances in the long term, said governor Adhikari.

Banking offense act to be amended

It is said that the amendment process will be carried forward in the existing Banking Offense and Punishment Act 2064 to help control non-commercial and disorderly activities that affect the stability of the financial sector.

The central bank is about to amend the Banking Offense and Punishment Act to discourage various individuals and communities from continuing chaotic activities in the banking sector, blackmailing bank employees.

According to the NRB, the instructions related to the prevention of money laundering will be issued based on the suggestions received from the mutual evaluation. In addition, it will be facilitated to revise the relevant laws and formulate a national strategy.

According to the central bank, the limit of first residential house loans will be increased from Rs. 15 million to Rs. 20 million.

There is a mention in the monetary policy that the guidelines related to working capital loans will be reviewed based on the suggestions of banks and financial institutions.

The system of giving at least 1 per cent additional interest if remittances are sent by opening remittance accounts in banks and financial institutions has been continued.

It is mentioned in the monetary policy that mergers and acquisitions of microfinance financial institutions will be encouraged so that existing facilities will be available if integrated transactions are conducted by the end of mid-July 2024. In addition, NRB has emphasised the use of the latest equipment and technology in association with international gateways to promote electronic payments.

The existing risk burden provisions of share mortgage loans, real estate loans and hire purchase loans will be reviewed.

Making special arrangements for distressed borrowers

The NRB is going to make special arrangements for the revival of troubled borrowers.

Governor Adhikari said that the Stressed Loan Resolution Framework would be issued to include the measures and procedures to be adopted by banks and financial institutions for the recovery and other management of borrowers who are in trouble due to natural disasters or other special circumstances.

According to the NRB, the guidelines regarding asset quality review of commercial banks and the internal credit risk classification of banks and financial institutions will be formulated and implemented.

The existing system of providing up to USD 1,500 twice a year as a passport facility to Nepali citizens visiting countries other than India will be amended.

The arrangements will be made to provide up to USD 2,500, said the NRB.

Sets seven targets

The Monetary Policy for the current fiscal year 2023-34 unveiled by the Nepal Rastra Bank today has set seven various targets.

The structure and targets of the new Monetary Policy seek to maintain the foreign exchange reserve at a level sufficient to cover the anticipated imports of goods and services at least for seven months.

The Monetary Policy has determined its policy rates to be based on the capacity of the foreign exchange reserves to cover imports and the target annual inflation rate. Additionally, the exchange rate of the Nepalese currency against the Indian currency has been maintained as it is.

It targets to keep interbank interest rates within the interest corridor by operating and promoting open market operations based on the position of the operating target.

Similarly, it has set a target of limiting inflation at 6.5 per cent by preventing pressure on prices by the monetary expansion.

The Central Bank has accorded priority to shift the fiscal resources to the productive sector in line with the target of achieving six per cent economic growth set by the budget for the current fiscal year.

The broad money supply is expected to increase by 12.5 per cent and credit to the private sector from banks and financial institutions is likely to go up by 11.5 per cent in the current fiscal year.

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