Monetary Policy: Old wine in new bottle

Kathmandu, July 23

Nepal Rastra Bank (NRB) today unveiled the Monetary Policy for Fiscal Year 2015-16, without making much change to the existing provisions.

Some of the key factors that affect money supply, such as cash reserve ratio (CRR) and statutory liquidity ratio (SLR), have remained unchanged.

Last fiscal, NRB had raised CRR — the portion of total deposits that banks and financial institutions (BFIs) must park at the central bank — for commercial banks to six per cent. This provision has been kept intact. Change in CRR, however, does not affect commercial banks, as they have to maintain a liquidity ratio of 20 per cent.

Similarly, development banks have to maintain CRR of five per cent as in the past, while finance companies do not have to park more than four per cent of the total deposits at the central bank like in the previous year.

Likewise, SLR — the portion of deposit that has to be invested in government securities and assets, such as gold, among others — has not been changed either.

Albeit, policy rate, also known as bank rate, has been revised downwards to seven per cent from eight per cent. This means BFIs that approach NRB — the lender of the last resort — for loans in dire situation will start getting funds at seven per cent interest rate from now onwards.

“Overall, the orientation of the monetary policy appears fine. It has given continuity to policies adopted in the past, indicating policy consistency,” former NRB governor Yubaraj Khatiwada, who introduced the monetary policy of last fiscal, told The Himalayan Times.

The monetary policy was introduced today in the wake of the devastating earthquakes of April and May.

To support reconstruction drive in the aftermath of the quakes, the Ministry of Finance has already introduced an expansionary budget of Rs 819.47 billion for the current fiscal — up 32.6 per cent than in the last fiscal — to achieve economic growth target of six per cent.

In this regard, many were expecting new provisions in the latest monetary policy to help the government achieve six per cent growth target, while offsetting the impact of expansionary budget on aggregate demand.

The monetary policy appears to have acknowledged these problems but has remained silent on how to proactively deal with these issues.

For instance, the policy says: “Implementation of the government’s fiscal policy, which has focused on reconstruction, will increase economic activities in the coming days. This will raise aggregate demand and ultimately affect prices, balance of external payments and financial stability.”

But the policy does not explicitly say how NRB plans to deal with these challenges.

All the policy says is money supply (M2) growth will be limited to 18 per cent and lending to the private sector will be raised by 20 per cent to achieve macroeconomic stability and growth of six per cent.

“The central bank at present faces a dual challenge of helping the government achieve its targeted growth rate and control activities that fuel inflationary pressure. So, monetary policy cannot be expansionary; and at the same time, it cannot be too tight either,” said Khatiwada.

Among others, the monetary policy has also failed to come up with measures to effectively deal with the issue of excess liquidity.

Banks and financial institutions are currently sitting on top of excess liquidity of over Rs 100 billion.

To prevent these excess funds from building inflationary pressure, NRB mopped up Rs 476.80 billion using various money market instruments in the last fiscal, which ended on July 16.

Despite these efforts, the level of excess liquidity still remains high and is expected to remain high in the coming days, as credit demand generally does not go up in the first quarter of every fiscal year and many instruments issued by NRB keep on maturing, which sends money back into the banking sector.

NRB does not have new plans to deal with this issue and has said it will continue using instruments introduced in the past, or float NRB Bonds, to mop up excess liquidity.

Having said this, it is not only NRB that should be held responsible for all the troubles seen in the banking sector. BFIs, especially commercial banks, should also be more innovative and come up with products to give a push to lending.

“BFIs here do not have a long-term vision and are still not willing to channel credit towards the productive sector. They want to continue earning profits by extending loans to the trading sector,” Khatiwada said, adding, “We have well understood the risks the real estate sector can pose. So, now is the time to increase exposure to the productive sector. This can only help the country achieve sustained economic growth.”

Other provisions

  • Maintain foreign exchange reserve to finance imports of goods and services of at least eight months
  • Permission to be extended to establish national-level Infrastructure Development Bank; minimum paid-up capital requirement fixed at Rs 20 billion
  • Banks to be categorised as ‘Systematically Important’ depending on impact they could create on the entire financial system; separate standards to be created to regulate and monitor such institutions
  • Prompt corrective action to be taken against BFIs that fail to meet liquidity requirements
  • Deprived sector lending requirement raised by 0.5 percentage point
  • BFIs allowed to extend loan of up to Rs one million on security of land not linked with motorable road
  • Special refinancing facility at one per cent interest to increase credit flow towards agriculture sector and small enterprises in districts with high poverty incidence
  • BFIs to be asked to keep aside a certain portion of profit to train human resources and fulfil corporate social responsibility
  • BFIs allowed to make use of local currency bonds to maintain statutory liquidity facility
  • Liquidity Monitoring and Forecasting Framework to be revised
  • Registration fees and other pre-operating expenses of foreign investors — who establish business with 100 per cent foreign investment — to be reckoned as investment
  • Foreign exchange facility of up to INR 75,000 to be extended to settle payments of Indian transport companies
  • Foreign exchange facility of up to $500 to be extended to Indian tourists visiting Mansarovar Kailash through Nepali tour operators