Sound monetary policy sought

Gopal Tiwari

Kathmandu, May 9:

In barely two months’ time, Nepal Rastra Bank (NRB) will come out with the new monetary policy. Meanwhile, NRB has already hinted at intervening in the ‘monetary market’ if commercial banks do not increase interest rates on deposits and protect public money by maintaining spread rates between lending and deposits.

In the wake of India’s ‘cautious’ monetary policy announcement that aimed at maintaining economic growth rate at seven per cent and inflation at five per cent, NRB may also take a similar stand.

Bankers and experts here commented that since Nepal’s economy is not totally monetised, NRB should take stock of the situation of how commercial banks are fighting for survival.

Narendra Bhattarai, immediate past-president of Nepal Bankers Association (NBA) is of the view that NRB should introduce mechanisms aimed at stabilising the monetary market. Interest rate in repo rate in Nepal stands at two per cent which NRB should reduce, felt Bhattarai.

Similarly, he pointed to the anomaly where if commercial banks purchase treasury bills amounting to worth Rs 10 million, NRB gives only 50 per cent when such banks need it back. He suggested NRB should introduce market stabilisation bonds (MSB) like in India for interest rate stabilisation.

Currently, NRB does not interfere in interest rate determination. Higher spread rates reflect two things – inefficiency of commercial banks and unscrupulous behaviour of commercial banks, say banking experts on conditions of anonymity.

Nepal’s current inflation has increased to 5.7 per cent compared to 4.7 per cent in the last fiscal year. The hike is attributed to a rise in the prices of petroleum products. Real growth rate of GDP stands at 3.6 per cent in the fiscal 2004-05. The forthcoming monetary policy is likely to be directed towards money supply, bank credit and interest rates.

In India, foreign inflow is huge due to increased exports, high revenue from call centre outsourcing and high money flow from NRIs, which have helped increase liquidity and allowed government to issue MSB. But the situation is not similar in Nepal.

Nepal is now facing problems related to exports and a fall in foreign assets of the banking sector. These do not encourage NRB to issue MSB, commented experts. NRB bonds were issued in early nineties when foreign exchange inflows were in a sound position.

Nara Bahadur Thapa, director of Nepal Rastra Bank (NRB), while talking to The Himalayan Times commented that India wants to maintain a high growth rate momentum and contain inflation at the tolerance level through a cautious monetary policy, which was announced recently.

Sashin Joshi, CEO of NIC Bank Ltd commented that India has tried to suppress inflation through its monetary policy. It has encouraged foreign banks in India to operate in a shareholding pattern, said Joshi. In such a context, NRB also has to adopt a policy through open market operations and should give green signal to hike in ‘interest rates’.

In Nepal, lending interest rate for sick industry is 1.5 per cent, bank rates 5.5 per cent and refinancing rates ranges from 1.5 per cent to three per cent. Nepal’s current treasury bills interest rates are at three per cent. Bhattarai, also the MD of Nepal Credit and Commerce Bank (NCC bank), opined that ‘interest elasticity’ is low in India while it is not so here. He demanded that NRB should come out with transparent mechanisms, as commercial banks never know on which date the central bank issues treasury bills.