The new monetary policy seeks to accelerate economic recovery

The Rastra Bank of Nepal on Sunday released the country’s monetary policy for the fiscal year 2023-24, zeroing in on economic recovery, curbing inflation, stabilizing interest rates and stabilizing credit demand.

The central bank said monetary policy has shifted from a „tight, cautious” approach to an „easing, cautious” approach, supporting growth amid an economic slowdown.

„Economic indicators like foreign exchange reserves, inflation, liquidity and interest rate are now in the safe zone,” central bank governor Maha Prasad Adhikari told a press conference after unveiling the new monetary policy.

“Positive results were achieved during the last financial year due to corrective measures and timely action taken by the central bank. The economy is progressing towards recovery,” he said.

The economic survey showed that Nepal’s annual economic growth rate slowed to 1.86 percent in the last fiscal year that ended in mid-July.

Inflation, the most important indicator, eased at the end of last fiscal due to contraction in domestic demand and price stability in the Indian market, Nepal’s biggest source of imports. India accounts for more than 60 percent of Nepal’s foreign trade.

It is a 'cautious’ monetary policy to support growth amid economic slowdown,” said economist Govinda Nepal.

“Nepal’s economy is not sound and safe at present. „Despite some progress in the foreign sector, the country’s economy is still at risk,” he said, adding that the policy target to use loans was a positive step.

„Another important point is that since loans were in the hands of a few businesses, the monetary policy is said to discourage credit concentration. This will help expand credit among small and medium entrepreneurs.

Last year, the International Monetary Fund (IMF) flagged concerns about large boom-bust credit cycles in Nepal’s financial sector. This means that the loan may have overgrown and the repayment capacity of borrowers may have decreased due to high loan rates.

Although Nepal’s credit expansion rate is the highest in South Asia, the country is yet to achieve satisfactory capital formation, the central bank said on Sunday.

„The real sector is not growing fast enough to drive credit flows towards it,” the official said.

Last year, the IMF asked Nepal’s Rastra Bank to have some of the country’s biggest commercial banks audited by international auditing firms because of doubts about the quality of their loans, a senior central bank official said.

Representatives of the IMF’s Article IV mission called for an audit to clarify the state of asset quality during a meeting with central bank officials.

„The central bank suspects misuse of subsidized loans and other incentives provided by these commercial banks,” the official said.

„Therefore, we have asked independent international auditors to audit the books of major commercial banks,” he said. „If any violation is found, they will be punished. Some of the big borrowers are under surveillance.

Economist Nepal said that most of the subsidized loans given to the private sector during Covid-19 were invested in the stock market and real estate.

“The sudden downturn in the stock market and real estate created a credit boom and disaster. Borrowers are unable to pay the loan and interest. This affected the productivity of manufacturing, construction and trade. It is clear that subsidized loans are not properly utilized.

The central bank said the new monetary policy aims to diversify credit from a few large borrowers to small and medium-sized enterprises (SMEs).

„SMEs engaged in manufacturing will get more priority than SMEs engaged in trade,” the official added.

The central bank in the last monetary policy revised the ratio of capital-risk-weighted assets to 100 percent for loans up to Rs 2.5 million and 150 percent for loans above Rs 2.5 million. This ratio is also known as capital adequacy ratio.

However, this quota will be revised and relaxed this financial year as the economy improves.

The maximum limit of 100 per cent capital and risk weighted asset ratio will be raised from Rs 2.5 million to Rs 5 million, the central bank said.

Additionally, the ratio of capital-risk-weighted assets will be reduced from 150 percent to 100 percent to help revive the automobile sector, particularly small vehicles, and commercial real estate.

„The capital-risk-weighted asset ratio of equity-backed loans will also be revised,” the official said.

The central bank will also revise working capital lending within the first quarter as per recommendations received from commercial banks.

„We will relax the rule depending on the most affected sectors,” the official said.

Nepal’s economy is yet to recover from the effects of the Covid-19 pandemic and the subsequent Russia-Ukraine war.

„Therefore, the central bank will keep all financial activities under stricter surveillance,” the official said.

Increased foreign reserves due to high remittances and low interest rates are gradually making the country’s economy vibrant, the central bank said.

„This monetary policy will help achieve 6 percent economic growth by keeping inflation below 6.7 percent,” Adhikari said.

The central bank said that the limit for first-time home loans will be increased from Rs 10.5 million to Rs 20 million.

This is followed by paying 1 percent more interest to Nepali migrant workers [than ordinary depositors] Remitter through banking system.

Nepal Rastra Bank said it will roll out a „stressed debt resolution framework” to restructure loans of borrowers troubled by natural calamities and other specific circumstances.

According to the budget for the financial year 2023-24, borrowers from banks and financial institutions beyond the specified limit will have to get a Permanent Account Number (PAN).

A separate governing body will be set up to effectively monitor and supervise savings and credit unions as mentioned in the budget.

Measures will be coordinated to establish and implement a centralized Know Your Customer (KYC), a mandatory process of identifying and verifying a customer’s identity at the time of opening an account and periodically renewing it.

The central bank said it will implement the report prepared by the committee set up to look into the problems of microfinance institutions.

Mergers and acquisitions of small financial institutions will be encouraged by providing incentives if they conduct consolidated transactions till mid-July 2024.

Due to surplus liquidity in banks, remittance facilities of up to $2,500 per person will be provided twice a year to Nepali citizens traveling to India or other countries.

To encourage investment in the manufacturing sector, the central bank has cut the policy rate, the lending rate to banks, to 6.5 percent.

National Automobile Dealers Association (NADA) president Drupa Thapa said the new monetary policy has encouraged the private sector. He said that some of the issues raised by auto dealers have been resolved.

„The central bank’s decision to review the ratio of capital-to-risk-weighted assets for rent-to-own and real estate lending, working capital lending and others will make the market somewhat buoyant,” Thapa said.

„But the current arrangement will only benefit entry-level car buyers. So, it is doubtful whether the problems of the entire automobile industry, which is one of the main sources of revenue for the government, will be solved,” he said.

However, Thapa is confident that the improvement in the stock market and the automobile and real estate sectors will have a ripple effect on the economy as a whole.