Tuesday, July 28, 2015

Major highlights of Nepal’s FY2016 monetary policy

Dr. Chiranjivi Nepal, Governor of Nepal Rastra Bank (the central bank), presented monetary policy for FY2016, the first under his governorship, last week. It was also the first one after the catastrophic 7.8 magnitude earthquake on 25 April. It followed the FY2016 budget introduced by Dr. Ram Sharan Mahat.

The monetary policy aims to help achieve the GDP growth and inflation targets, and to maintain balance of payments stability. It also aims to maintain overall financial sector stability, manage excess liquidity, channel credit to productive sectors, and make access to finance more inclusive, including subsidized housing credit to households who lost houses due to the earthquake.

The table below summarizes the major indicators and targets of monetary policy for FY2016.

Monetary Policy
Indicators FY2012 FY2013 FY2014 FY2015R FY2016E
GDP growth (%) 4.5 3.6 5.1 3.0 6.0
Inflation (%) 8.3 9.9 9.0 7.5 8.5
Imports of goods and nonfactor services (months) 9.4 9.3 10.5 11.3 8.0
M2 growth (%) 22.7 16.4 19.0 16.0 18.0
Total credit growth (%) 13.2 17.2 12.7 18.7 23.4
Growth of credit to government  -0.3 3 -16.4 -22 68.5
Growth of credit to private sector 11.6 20.2 7.3 18.0 20
Cash Reserve Ratio (%)
Commercial banks 5.0 5.9 5.0 6.0 6.0
Development banks 5.0 5.5 4.5 5.0 5.0
Finance companies 5.0 5.0 4.0 4.0 4.0
Bank rate (%) 7.0 8.0 8.0 8.0 7.0
Productive sector mandatory lending (% of total loans)
Commercial banks 20.0 20.0 20.0
Agriculture and energy 10.0 12.0 12.0 12.0
Development banks 15.0 15.0
Finance companies 10.0 10.0
Refinancing rates (%)
Agriculture, hydro, poultry, livestock, fishery 6.0 5.0 4.0 4.0
re-lending max 9.0 9.0 9.0 9.0
Sick industries 1.5 1.5 1.0 1.0 1.0
re-lending max 4.5 4.5 4.5 4.5 4.5

Earthquake-related provisions:

  • Zero percent refinancing facility for BFIs willing to provide loans at 2% interest to those households affected by the earthquake, provided that such households meet the requirements set by the government. Accordingly, households within and outside Kathmandu Valley can access the subsidized loans of up to NRs2.5 million and NRs1.5 million, respectively.
  • The NRB will help assist in the establishment of an Economic Rehabilitation Fund, which will provide refinancing facility and interest subsidy to the business community affected by the earthquake.

One of the main features of this monetary policy is the mandatory provision to increase paid-capital by FY2017. Specifically, the policy mandates commercial banks to increase their paid-up capital four-fold to $80 million by end-FY2017. Similarly, national level development banks will have to increase their paid-up capital by nearly three-fold to $25 million. For other development banks and finance companies, the mandatory increase in paid-up capital is as per their operational coverage in the country, but is still substantial.

Interestingly, it also mentions the review of the moratorium on the establishment of new banks and financial institutions. The first provision would in a way compel the BFIs to merge to meet the paid-up capital requirement. The second provision opens up the possibility to increase the number of BFIs.

The economy is still not ready to add new BFIs as too many of them vied for the small base of customers earlier, resulting in unhealthy competition and the banking crisis in FY2011. Consolidation of BFIs should still be one of the main agendas. If the intention of the review of the moratorium is to increase access to finance, then there are other ways to achieve the same objective (e.g, making it easy for existing BFIs to operate in the unbanked areas, credit through microfinance/microcredit institutions, etc). Also, monetary policy cannot alone correct the anomalies arising from persistent supply-side constraints and seemingly unfavorable investment climate.

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