Implementing Provisions Of Monetary Policy

After a delay of one week at the instruction of the government, the Nepal Rastra Bank unveiled the monetary policy for the fiscal year 2081/82 on July 26, 2024. The announcement of the monetary policy, which was expected to come out on July 19, was put off as it had to be reviewed by the Prime Minister’s economic advisor Yubaraj Khatiwada. 

The economy of the country is at a crossroads now. The banking sector has not been able to expand credit. As such, the economic activities are in the doldrums. The newly unveiled monetary policy aims at dynamising the economy by facilitating credit to industries small-scale or large-scale - so as to achieve the economic growth of 6 per cent as envisaged in the budget. The monetary policy intends to facilitate the implementation of the provisions of the current budget, which was formulated by the erstwhile government. 

Excess liquidity

The monetary policy aims at confining the rate of inflation to 5.5 per cent. According to the NRB Governor, there are some risks but it is possible considering factors contributing to inflation. When there is excess liquidity in the market, banks and financial institutions are unlikely to utilise the standing liquidity facility. So the bank rate has been slashed to 6.5 per cent from 7 per cent. The policy rate has been retrenched to 5 per cent from 5.5 per cent. In order to give stability to the interest rate, the deposit collection rate has not been changed. It is at 3 per cent. The monetary policy has set a target of expanding credit to 12.5 per cent, up from 11.5 per cent.  The provisioning requirements for performing (good) loans have been lowered to 1.1 per cent from 1.2 per cent. This provision is expected to increase the profitability of banks. 

The monetary policy has come as great relief for construction entrepreneurs. The construction entrepreneurs are complaining that they are facing hassles. They have not received payments to the tune of Rs. 60 billion. When their cheques are dishonoured, they may be blacklisted. When they are blacklisted, their accounts are blocked and they cannot conduct any transactions. Now, the monetary policy has made a provision, whereby the deadline for paying interest on loans has been extended till the end of Mangsir. And they will not be blacklisted merely on the grounds of their cheques dishonoured. This is great relief for them. 

Likewise, the monetary policy has made a provision that if one of the joint venture partners is blacklisted, it will not affect the other partners. This means the other partners can conduct banking transactions and so their business will not be hampered.  

The monetary policy intends to bring about stability in the microfinance sector. A contemporary review of the regulatory framework regarding interest rates and service charges imposed by microfinance institutions will be made. At present, microfinance institutions are allowed to charge a maximum of 15 per cent interest on loans. The borrowers of such institutions may be unable to pay their loans owing to unforeseen circumstances. Such borrowers will be allowed to have their loans restructured by paying a certain percentage of interest. The monetary policy has also encouraged the mergers or acquisitions of microfinance institutions. 

The cooperative sector is beset by one problem after the other. A large number of cooperative operators have been apprehended for fraudulent activities. However, the depositors are in a dilemma as to whether they will get their deposits back. The monetary policy has tried to give respite to some of such depositors by returning the deposits to the depositors holding up to Rs. 500,000 on the collateral of the assets of the promoters and their immediate families.         

The monetary policy has lifted the cap of a maximum of Rs, 200 million on institutional loans on share collateral. However, the cap on individual loans set at Rs. 150 million has not been removed. The cap should have been removed so as to give a boost to the share market. The share market is improving now with a change in the government. However, this could be a nine days’ wonder. 

The monetary policy has also encouraged the establishment of start-up businesses by providing required loans. The monetary policy has made a provision of collateral-free loans for those going abroad for employment. Such people are facing problems as they have to take loans at a usurious rate of interest. Loans will also be provided for those who want to engage in the agriculture business on the collateral of agricultural produce. The monetary policy aims at promoting youth entrepreneurship.  

AI guidelines

This is the age of technology. Artificial intelligence (AI) is one of the newest technologies. It has found application in the banking sector, too. With its increasing use, there may be risks, too. So AI guidelines will be formulated to regulate the technology in banking and other sectors. The monetary policy intends to support the policies of banks and financial institutions so as to spur their growth. The monetary policy, therefore, aims at reducing interest rates to expand credit, which is sluggish now, in view of the fact that the external financial situation and the price level are comfortable owing to the interest rate corridor.

In a nutshell, the monetary policy is flexible enough to help in making the economy robust by making provisions in various sectors such as banking, construction, share market, start-up and youth entrepreneurship. The monetary policy has emphasised financial stability and prioritised productive-sector lending and the quality of lending. The monetary policy has made some new provisions and made some old provisions flexible. Bringing about stability in the banking and financial sector and helping achieve the target of economic growth are two of the main objectives of the monetary policy. 

(Maharjan has been regularly writing on contemporary issues for this daily since 2000.)