NRB unveils ‘flexible’ monetary policy

NEPAL Rastra Bank (NRB) on Sunday unveiled a ‘flexible’ monetary policy for fiscal year 2013-14 by increasing the compulsory lending to energy and agriculture, reducing statutory liquidity ratio and cash reserve ratio and further easing refinancing to the productive sector. The policy has announced taking prompt corrective action (PCA) against banks and financial institutions (BFIs) failing to maintain adequate liquidity. Currently, such an action is taken only for BFIs’ failure to maintain capital adequacy ratio at the required level. Unveiling the monetary policy, NRB Governor Yuba Raj Khatiwada said the policy has been made flexible as it is necessary to help attain high economic growth. The government has targeted 5.5 percent economic growth this fiscal year. The growth rate last fiscal year was 3.6 percent. The monetary policy has sought to increase internal credit by 17.1 percent to achieve the economic growth target. To tame inflation at 8 percent, the policy seeks to keep monetary expansion at 16 percent. It, however, admits the move will only address demand-induced inflation. The policy has increased the compulsory lending requirement for commercial banks to energy and agriculture sectors to 12 percent within mid-July 2015 from previous 10 percent. This is in line with the government’s focus on energy and agriculture. Bankers, however, termed the provision challenging. “Although we are interested in investing in the hydropower sector, developers are failing to arrange their portion of the equity,” said Ashoke Rana, chief executive officer of Himalayan Bank Limited. Commercial banks have to increase lending to the productive sector to 20 percent within mid-July 2015. The central bank will also ask development banks and finance companies to submit their plan to invest a certain percent of their lending to the productive sector within mid-January 2014, according to the policy. It has reduced the cash reserve ratio (CRR) to 5 percent for commercial banks, 4.5 percent for development banks 4 percent for finance companies in order to increase liquidity in the market. The central bank has also reduced the statutory liquidity ratio (SLR) to 12 percent for commercial banks, 9 percent for development banks and 6 percent for finance companies. For ‘D’ class financial institutions, it has been maintained at 4 percent. The interest rate of refinancing that central bank provides to the productive sectors such as agriculture, hydropower, poultry, livestock and fishery has been reduced to 5 percent from earlier 6 percent. BFIs cannot charge more than 9 percent on such loans, according to the policy. The interest rate of refinancing that gœs to sick industries, cottage and small industries, export business, businesses operated by women and people certain communities who go for foreign employment has also been slashed to 1 percent from earlier 1.5 percent. BFIs should charge not more than 4.5 percent when re-lending such refinancing, according to the central bank. Vice-president of the Federation of Nepalese Chambers of Commerce and Industry Bhaskar Raj Rajkarnikar hailed the policy for flexibility on credit expansion which would increase production and investment. “The focus on energy and agriculture and refinancing for export businesses is praiseworthy,” he said. HIGHLIGHTS OF THE MONETARY POLICY Cash reserve ratio, statutory liquidity ratio reduced Interest rate on refinancing to agriculture, hydropower reduced to 5pc Interest rate on refinancing to sick industries and exports reduced to 1pc Compulsory lending to hydropower, agriculture increased to 12pc Guideline on acquisition to be introduced Spread rate to be maintained at 5pc Deadline for paid-up capital increment extended by one year Stress testing required for finance companies Provision of dynamic provisioning PCA to be implemented even for failing to maintain required liquidity BFIs to be forced to lower institutional deposits’ share to less than 60pc NRB Governor Yuba Raj Khatiwada unveils the monetary policy for this fiscal year in Kathmandu on Sunday. POST PHOTO CONTD ON MONEY II