Market determines interest rate: NRB

Kathmandu, Apr. 12: The Nepal Rastra Bank (NRB) said that the bank interest rates are not controlled by the central bank but are determined by the market. 

The central bank has left the interest rate at the discretion of the market for more than three decades now, we don’t interfere in it, Governor of the NRB, Maha Prasad Adhikari, said at a programme organised by the central bank to publish the macroeconomic and financial status report of the country of the eight months of the current fiscal year 2022/23. 

Responding to the question why the improved economic indicators couldn’t improve the economic satisfaction in the part of the businesses and consumers as well as the perception of the future of the national economy, Governor Adhikari said that it would take a while to reach the impact of the positive development to the common people.  

“We are aware that improved economic situation has not resulted in the happiness on the part of common people. However, only bank interest rate is not the cause to bring happiness on the face of people, productivity, employment and other factors also play important roles,” he said. 

He also maintained that the share of interest in the entire process and cost of production of the consumer goods or services is very small. 

Speaking at the same programme, Executive Director of the Economic Research Division at the NRB, Dr. Prakash Kumar Shrestha, said that the interest rate should be determined by the market on the basis of monetary demand and supply of the loanable fund and that the NRB doesn’t have much role in it. 

Downward trend of interest rate

According to him, interest has a cycle, and now its catching a downward trend. “Yet, the question is still valid about the utilisation of the fund. If the credit is used in unproductive sectors and areas other than the specified while obtaining the loan, crisis may emerge. Using concessional loan or refinance in real estate and stock market was one of the cause of the current crisis,” he said. 

Likewise, Governor Adhikari said that the central bank has set the spread rate (difference between the interest rate of deposit and lending) at 4.2 per cent for the fourth quarter of the current fiscal year, which begins on Friday, and that the rest is controlled by the market. 

The central bank is also vigilant about the availability of funds with the government and mobilisation of concessional loans to the business sectors. It is also true that a part of that fund was misused and many banks and businesspeople have been punished for the same offense, said Adhikari. 

Base rate and bank interest rate has begun to witness correction from the eighth month of this year. According to the central bank statistics, solvency of BFIs is above the minimum requirement. Solvency of commercial bank is 13.01 per cent, development 12.71 per cent, and finance eompanies 17.05 per cent while the minimum requirement is just 11 per cent.

It also said that monitoring and supervision of the NRB is further strengthened which might be one of the reasons behind the increased non-performing loan in recent time. 

Social banking in MFIs

Meanwhile, the NRB is studying the possibilities to implement some of the social banking measures in the microfinance sector. 

Stating that there were some anarchies in the microfinance banking, Governor Adhikari said that there was even a demand or call not to repay the loan obtained by the microfinance institutions (MFIs). 

According to him, correcting the microfinance banking is a need of current time. “We are looking for ways to making reforms and possibilities of implementing the social banking measures in MFIs,” he said. 

Inflation down slightly, food inflation remains high

The NRB said that the inflation would be contained at 7 per cent by the end of the current fiscal year 2022/23 - in mid-July. 

According to the Current Macroeconomic and Financial Status of the eighth month of the current fiscal year 2022/23, rate of inflation by mid-March was 7.44 per cent which has moderated from 7.88 per cent a month earlier. 

According to the report, the year-on-year consumer price inflation remained at 7.44 per cent in mid-March 2023 compared to 7.14 per cent a year ago. Food and beverage inflation stood at 5.64 per cent whereas non-food and service inflation rose to 8.87 per cent in the review month.

This spiked price of food and beverage has caused a panic for consumers, fueling negative  perception about the economic prospects in the near future. 

Under the food and beverage category, y-o-y price index of cereal grains and their products increased by 14.35 per cent, restaurant and hotel by 14.09 per cent, spices by 10.88 per cent, tobacco products by 10.83 per cent, and alcoholic drinks by 8.78 per cent.

Similarly, items under the non-food and services category, like transportation increased by 13.23 per cent, health by 10.39 per cent, and housing and utilities by 9.72 per cent. 

Improved economic indicators

Remittance inflows increased by 25.3 per cent to Rs.794.32 billion in the eight months against a decrease of 1.3 per cent in the same period of the previous year. 

Remittance of Rs. 99 billion per month is a significant progress, we can hope for even better days in the coming months, said Governor Adhikari. 

He also said that the country has come out of a very stressful scenario in terms of the depleting foreign exchange reserve, Balance of Payment (BoP) and current account deficit. 

“We were in very serious situation with 12.8 per cent current account deficit last year while Pakistan which is on the verge of economic collapse had only 4 per cent such deficit. This experience has strengthened our capacity and skill to address the monetary troubles,” said Adhikari.  

Likewise, Dr. Shrestha, said that remittance growth is promising – number of Nepali migrant workers has been increasing and growing interest rates has also attracted more remittance. Likewise, BoP was at deficit of Rs. 255 billion last year, but has been increasing since October 2022, reaching Rs. 148 billion in surplus by mid-March this year. 

However, credit growth is less than expected, NRB’s concern is drawn to this, said Shrestha.  

He also maintained that the policy will be adjusted as per the economic indicators and need in the national economy. “Protest programmes will not help to make corrections in the interest rates, availability sufficient funds will have an impact on it,” he stated.