KATHMANDU, JULY 22
The Monetary Policy for the fiscal 2022-23 has primarily focused on promoting macroeconomic stability by countering inflationary and external sector pressures, while supporting economic growth by channelising financial instruments into the productive sector.
Unveiling the Monetary Policy today, NRB Governor Maha Prasad Adhikari said the central bank was compelled to control credit expansion in view of surging imports, burgeoning trade gap and pressures on the current account and foreign exchange reserves. Thus, the policy for the current fiscal year has lowered credit expansion to 12 per cent compared to 19 per cent in the last financial year.
Interacting with mediapersons after the policy was unveiled, Prakash Shrestha, head of NRB's Research Department, said the Monetary Policy had basically sought to reduce the credit flow towards the unproductive and import-based sectors. "Tightening the credit flow doesn't mean it will be harder to achieve the economic growth target because credit will be diverted towards internal productive sectors, such as agriculture and export-based industries."
The Monetary Policy states that the rates under the interest rate corridor have been increased by 1.5 percentage points and the bank rate has been maintained at 8.5 per cent, the policy rate at seven per cent, and the deposit collection rate at 5.5 per cent.
This is in line with the general trend seen around the world where many central banks have raised interest rates to tame inflation in the wake of rise in crude oil and commodity prices after Russia invaded Ukraine in February.
To further tighten the investable funds in the banking sector, the Monetary Policy has increased the cash reserve ratio by a percentage point to four per cent with effect from August 17.
The limit of Statutory Liquidity Ratio has also been increased - 12 per cent for commercial banks and 10 per cent for development banks and finance companies. This provision shall be in place till mid-December.
The earlier SLR was 10 per cent for commercial banks, eight per cent for development banks, and seven per cent for finance companies.
Private sector players are not very thrilled with the tight Monetary Policy.
According to Dinesh Shrestha, vice-president (industry) of the Federation of Nepalese Chambers of Commerce and Industry, the Monetary Policy 2022-23 will exacerbate the liquidity crunch facing the banking sector. "Increasing the CRR to four per cent and raising the SLR will worsen the liquidity crunch situation with billions of rupees frozen in the bank vaults to meet the NRB criteria.
It will also increase the interest rate on loans."
The Monetary Policy also states that the central bank will only provide refinancing facility to productive sectors, including agriculture, export-oriented sectors, and COV- ID-battered sectors that are yet to recover from it. Moreover, the interest rate of credit flow in the productive and non-productive sector will be different.
Dinesh termed the provision of tightening the credit disbursement 'absurd' at a time when the prices of commodities and raw materials are skyrocketing. "The policy disregards hardships of traders struggling to stay afloat."
Special provisions announced earlier to encourage merger and acquisition in the financial sector have been extended till mid-December. Also, the earlier policy, whereby share transactions of BFIs going for merger or acquisition were suspended, has been scrapped.
The Monetary Policy has scrapped the limit of the margin loan up to Rs 40 million from one BFI. However, it has given continuity to the cap of Rs 120 million to seek loans from multiple BFIs to buy shares.
According to Chhote Lal Rauniyar, the immediate past president of Nepal Investors Forum, the central bank should have completely scrapped the limit on margin loans. "However, scrapping of the margin loan limit of Rs 40 million from one BFI has boosted the sentiment, especially of small and medium investors."
Meanwhile, in a bid to promote start-ups, the central bank has said the potential of alternative forms of financing like peer-to-peer lending and crowd-funding would be explored to increase access to credit for start-up businesses.
The governor also announced that the counter-cyclical buffer will be implemented at the end of the current fiscal year. The Monetary Policy of 2019 had a provision of a countercyclical buffer - a macro-prudential instrument used to counter possible cyclical systemic risks among banks, by two per cent. However, it was scrapped in a bid to increase the credit flow during the COVID-19 pandemic.
Reintroducing this provision will require banks to increase their capital to increase credit flow. Currently, the capital ratio of commercial banks is 11 per cent.
The policy has stated that the foreign exchange reserves should cover the imports of goods and services for seven months. With an aim to achieve an economic growth rate of eight per cent for the current fiscal year, the Monetary Policy mentions the target to tame inflation within seven per cent in the current fiscal year.
A version of this article appears in the print on July 23, 2022, of The Himalayan Times.
