Monetary Policy Review, FY 2077/78 (Q3)

Dipendra Karki | May 18, 2021

Nepal Rastra Bank (NRB) on Tuesday [2078.02.4] announced a third quarterly monetary review of the current FY 2077/78. Some of the important points of review are highlighted below:

Covid Targeted Review

  1. Review of monetary policy has mandated Bank and Financial Institutions to arrange loans for industries related to production of liquid oxygen plant at the base rate. At present, the base rate of banks is around 7 percent.
  2. A special refinancing loan of up to Rs. 500 million for setting up liquid oxygen plants and up to Rs. 200 million for setting up of oxygen plants will be provided to the existing health care providers, hospitals or industries. The interest rate on refinancing is one percent (1%).
  3. Banks and financial institutions will not be allowed to charge any penalty or additional fee for the recovery of loans from customers during the injunction period.
  4. NRB has made an arrangement not to call/withdraw the loan and not to issue notice of auction for one month after the expiry of the injunction.
  5. Banks and financial institutions will be encouraged to provide discounts to customers who pay loan installments or interest during the injunction period. Last year, a 10% discount was provided during the lockdown. No exemption has been announced this time.Hydropower
  6. The Central Bank has clarified that if the Required Commercial Operation Date of the power projects already approved by the Central Bank for interest capitalization changes, the approval of central bank will not be required for capitalization of interest for that period.Stock Market:
    What is the limit of share pledge loan?
  7. Nepal Rastra Bank (NRB) has reviewed the existing system of share pledge valuation in its third quarterly review of monetary policy.The central bank has made an arrangement to calculate on the basis of the 180 days average value of the closing price or the prevailing market price whichever is lower when evaluating the shares for the security of loans of margin nature. Earlier, the 120-day average price was compared with prevailing market price to provide loan limits on the basis of whichever is lower.The provision of loan disbursement up to 70 percent of valuation has been continued.Deposit & Loan
  8. Arrangements have been made for the renewal of expired term deposits, renewal of collateral and letter of credit and renewal of loan at the request of the customer during the injunction period issued for the reduction of COVID-19 infection. Under normal circumstances, the customer must submit a written request. The bank would not renew if it did not see the need. This time, however, an arrangement has been made for automatic renewal on request.
  9. NRB said that the information related to the change in interest rate of deposits and loans would be made available to the concerned customers electronically through quarterly review. Banks are now publishing interest rates on papers on a monthly basis and on their websites. Now they have to send it by SMS or email to the mobile number given by the customer.
  10. In the case of bank accounts that have become inactive due to non-updating of customer identities, NRB has made arrangements for banks and financial institutions to update the accounts electronically.
  11. The NRB has stated that the funds allocated by the banks and financial institutions under social responsibility (CSR) will be made available across the country giving priority to life saving, public interest and philanthropic work. Banks and financial institutions should allocate one percent of last year’s profit to CSR. The money will be spent on oxygen cylinders, oxygen concentrators, life-saving vaccines and medicines. Expenditure on philanthropic works such as innovation centers of national importance and human services can also be counted as expenditure from CSR fund.

Economy during pandemic & aforeseen consequences

4% growth rate is difficult: A restraining order has been issued in 74 districts of the country after the second wave of Covid 19 intensified. Most economic activities have been suspended due to strict sanctions. Even the existing industries are operating their plants at half capacity. Other areas are also deserted. It is estimated that this situation could cause problems in the economy for a long time. Even though the economy has been moving in the right direction for the first nine months of FY 2077/78, achieving an estimated 4 percent economic growth is likely to be challenging due to the imposition of sanctions in many places to control the transition to the second wave of COVID-19. Although the inflow of remittances has been satisfactory till April / May of the current fiscal year, the second wave of COVID-19 has spread globally and the number of Nepalese going for foreign employment has not increased for more than a year. The balance of payments surplus has been declining in recent months due to the expansion of imports. However, imports other than health products are likely to be affected due to the re-closure. As a result, balance of payments surplus is likely to decline, but foreign exchange reserves are expected to remain above the target level by the end of the current fiscal year. Although inflation remained under control till the third quarter of the current fiscal year, the recent rise in crude oil prices in the international market, higher inflation in India and depreciation of the Nepalese rupee has put some pressure on inflation in the coming days. However, due to weak domestic demand and easy supply management, inflation is likely to remain within the target range in the current fiscal year.

Credit expansion may slow down: The closure imposed due to the second wave of Covid 19 will affect the economic activities again and the banking sector will also be affected. The banking sector was able to manage the impact of the first wave of COVID-19 due to regulatory policy facilitation. However, the closure due to the second wave of Covid-19 is likely to affect economic activities again and affect the banking sector as well. In recent months, credit from the banking sector to the private sector has risen in an encouraging manner, will now be slowdown. However, credit expansion is expected to exceed the initial target of monetary policy for the rest of the current fiscal year.

Interest rate will not increase: Demand for credit has declined since the first wave of COVID-19 began, but interest rates on deposits and loans have been declining due to increased liquidity flows due to flexible monetary policy. “The reduction in interest rates has helped increase demand for loans in recent months. Short-term interest rates have risen slightly since April 2077, when the demand for credit increased significantly. This indicates that interest rates on loans and deposits will rise in the coming days, but the recent shutdown will reduce demand for new loans and the banking sector’s liquidity and interest rates will remain normal.

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