Nepal Rastra Bank (NRB) on Sunday
unveiled a ‘flexible’ monetary policy for fiscal year 2013-14 by
increasing the compulsory lending to energy and agriculture, reducing
statutory liquidity ratio and cash reserve ratio and further easing
refinancing to the productive sector.The policy has announced taking prompt corrective action (PCA) against banks and financial institutions (BFIs) failing to maintain adequate liquidity. Currently, such an action is taken only for BFIs’ failure to maintain capital adequacy ratio at the required level.
Unveiling the monetary policy, NRB Governor Yuba Raj Khatiwada said the policy has been made flexible as it is necessary to help attain high economic growth.
The government has targeted 5.5 percent economic growth this fiscal year. The growth rate last fiscal year was 3.6 percent. The monetary policy has sought to increase internal credit by 17.1 percent to achieve the economic growth target.
To tame inflation at 8 percent, the policy seeks to keep monetary expansion at 16 percent. It, however, admits the move will only address demand-induced inflation.
The policy has increased the compulsory lending requirement for commercial banks to energy and agriculture sectors to 12 percent within mid-July 2015 from previous 10 percent. This is in line with the government’s focus on energy and agriculture.
Bankers, however, termed the provision challenging. “Although we are interested in investing in the hydropower sector, developers are failing to arrange their portion of the equity,” said Ashoke Rana, chief executive officer of Himalayan Bank Limited.
Commercial banks have to increase lending to the productive sector to 20 percent within mid-July 2015. The central bank will also ask development banks and finance companies to submit their plan to invest a certain percent of their lending to the productive sector within mid-January 2014, according to the policy.
It has reduced the cash reserve ratio (CRR) to 5 percent for commercial banks, 4.5 percent for development banks 4 percent for finance companies in order to increase liquidity in the market.
The central bank has also reduced the statutory liquidity ratio (SLR) to 12 percent for commercial banks, 9 percent for development banks and 6 percent for finance companies. For ‘D’ class financial institutions, it has been maintained at 4 percent.
The interest rate of refinancing that central bank provides to the productive sectors such as agriculture, hydropower, poultry, livestock and fishery has been reduced to 5 percent from earlier 6 percent. BFIs cannot charge more than 9 percent on such loans, according to the policy.
The interest rate of refinancing that goes to sick industries, cottage and small industries, export business, businesses operated by women and people certain communities who go for foreign employment has also been slashed to 1 percent from earlier 1.5 percent. BFIs should charge not more than 4.5 percent when re-lending such refinancing, according to the central bank.
Vice-president of the Federation of Nepalese Chambers of Commerce and Industry Bhaskar Raj Rajkarnikar hailed the policy for flexibility on credit expansion which would increase production and investment. “The focus on energy and agriculture and refinancing for export businesses is praiseworthy,” he said.
Amid bankers’ complaints about duplication of loans provided under the deprived sector lending, the central bank continued increasing its rate by 0.5 percent point. Banks have to lend at least 4.5 percent, development bank 4 percent and finance companies at 3.5 percent of their total loans to the sector.
The central bank has announced a number of measures to maintain financial stability, increasing financial access and benefiting both depositors and loanees. Stating that the spread rate (difference of interest rates on deposits and loans) being enjoyed by BFIs is high, the central bank said it would take measures to maintain the rate at 5 percent. Last fiscal year, the average spread rate was 7.1 percent, according to the NRB.
However, bankers expressed doubts over the central bank’s calculation of the spread rate. “I think the spread rate should not have been that high,” said Sashin Joshi, chief executive officer of NIC Bank Asia. “There might be some difference between the calculations done the NRB and the banks.”
The monetary policy also announced introducing a guideline on acquisition to encourage consolidation of the banking sector. The NRB extended deadline of increasing the paid-up capital to the required level to Mid-July 2014 from earlier Mid-July 2013. It announced that BFIs would have to increase their capital base in the days to come. Governor Khatiwada said to what extent the capital base will have to be increased will be fixed based on discussions. “The capital base will be determined whenever we will open new licensing,” he added.
Stating that over dependence on institutional depositors increased the BFIs’ vulnerability, the monetary policy has provisioned that BFIs should maintain the share of such deposit below 60 percent within a certain period.
In a big relief to BFIs, the policy also announced making a provision of ‘dynamic provisioning’, which means keeping provisioning even between the four types of provisioning based on the actual risk exposure, according to Khatiwada.
Currently, 1 percent provisioning is imposed on good loan, and the rate increases to 25, 50 and 100 percent based on the delays in loan repayment.
The NRB also announced introducing a policy that bars BFIs from maintaining the difference of interest rates on deposits and loans of similar products more than a certain level.
The central bank will encourage establishment of infrastructure development bank through foreign joint venture. National-level finance companies will also have to conduct stress test.
In order to promote micro-finance institutions (MFIs), the policy has increased the limit of deprived sector loans to be provided without collateral to Rs 150,000 from Rs 100,000. The loan to be provided by accepting collateral has been increased to Rs 40,000 from Rs 300,000.
The NRB also announced providing refinancing at 5 percent for BFIs’ loan up to Rs 1 million to small and medium scale industries. Such loans should be provided to entrepreneurs at not more than 10 percent, says the policy.
Highlights of the Monetary Policy
Cash reserve ratio, statutory liquidity ratio reduced
Interest rate on refinancing to agriculture, hydropower reduced to 5pc
Interest rate on refinancing to sick industries and exports reduced to 1pc
Compulsory lending to hydropower, agriculture increased to 12pc
Guideline on acquisition to be introduced
Spread rate to be maintained at 5pc
Deadline for paid-up capital increment extended by one year
Stress testing required for finance companies
Provision of dynamic provisioning
PCA to be implemented even for failing to maintain required liquidity
BFIs to be forced to lower institutional deposits’ share to less than 60pc
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