Monetary Policy 2077/78: Major Highlights & Announcements

July 17, 2020 | Investopaper

Nepal Rastra Bank has released the monetary policy for the current fiscal year 2077/78.  Governor Maha Prasad Adhikari expressed that the policy focuses at minimizing the impact of Covid-19 on the economy.

The government has set a target of 7 percent economic growth in the current fiscal year. In order to achieve the same goal, the central bank has formulated the policies. The monetary policy has placed a special emphasis on investment in agriculture, energy and small and medium enterprises with the aim of minimizing the impact of Corona on the economy. The policy aims to promote the Agriculture Development Bank as a leading bank for the development of the agricultural sector.

You May Also Like: Highlights Of Fiscal Budget Of Nepal FY 2077/78

See the highlights of monetary policy for the FY 2077/78 below:

Tourism Sector

The monetary policy of FY 2077/78 (2020/21) focuses on minimising the effects of COVID-19 pandemic on the economy of the nation.

Priority will be given to the flow of working capital, concessional loans and refinancing for the revival of aviation business, transportation, hotel, restaurant and other tourism enterprises which have been severely affected by the COVID-19 crisis.

In case of lack of capital to complete the construction of projects related to the tourism sector, provision will be made for easy availability of loan from banks and financial institutions for such projects.

Development Bank should disburse at least 20 percent of its total loan investment and the finance companies have to disburse at least 15 percent of the loan to the specified sectors including agriculture, micro, home and small enterprises, energy and tourism by Ashad end, 2081 BS.

To View The Full Monetary Policy For Fiscal Year 2077/78, CLICK HERE.

Share Market

In the monetary policy, NRB has increased the limit of share pledge loan to provide relief to the capital market.

The central bank has increased the limit of share pledge loan to 70 percent. Earlier, only 65 percent ​​loan was available by keeping share as collateral.Thus, NRB has increased such loan limit by 5 percent to 70 percent as per the demand of investors.

For providing margin loan on share collateral, the average price of 120 days will be taken for the valuation of shares. Previously, valuation of shares was done based on the average price of the last 180 days or the prevailing market price of the stock whichever is less.

Related: Major Factors Influencing The Share Market Of Nepal

Bank and Financial Institutions

The policy has made the provision for all banks and financial institutions to declare and distribute cash dividend only up to 30 percent of the net distributable profit of the Fiscal Year 2076/77 (not exceeding the weighted average interest rate of the deposit maintained by the said institution in Ashad end 2077).

However, the distribution of cash dividends to the banks with a net distributable profit of less than 5 percent of the total paid-up capital will be prohibited.

Nepal Rastra Bank has increased the credit to core capital plus deposit ratio (CCD) limit from 80 percent to 85 percent until Ashad end, 2078 BS.

The time period for commercial banks to issue at least 25 percent debenture of their paid up capital by Ashad end 2077 BS has extended to Ashad end, 2079 BS.

From the Fiscal Year 2077/78, the national level development banks should implement the provision of Basel-3.

Microfinance

Nepal Rastra Bank has withheld the licensing of microfinance institutions. In addition, the licensing process of microfinance  institutions (in the process of licensing) has also been canceled.

Similarly, the policy has increased the credit limit on loans provided to poor, low-income individuals, firms or groups engaged in agriculture, micro-enterprises and businesses with acceptable collateral for commercial projects  from Rs. 7 lakhs to Rs. 15 lakhs.

Microfinance institutions (MFIs) can charge up to a maximum of 15 percent interest on loans.  The central bank will make the determination of interest rate  more systematic by fixing the base rate calculation method in MFIs.

NRB has made a provision for microfinance institutions not to deposit any amount other than long term funds in the bank for a period of more than 3 months.

The central bank will encourage the mergers and acquisitions of microfinance institutions to strengthen their capital base.

Related: Merger/Acquisition Of Microfinance Companies In Nepal

Big Merger

Nepal Rastra Bank has made the Big Merger voluntary. If the commercial banks start joint operation in accordance with the merger /acquisition policy by Ashad 2078, the central bank will offer the following additional incentives from the date of commencement of joint operation to Ashad, 2079 in addition to the existing facilities.

(A) Discount will be given by 0.5 percentage point in mandatory cash ratio and 1 percentage point in statutory liquidity ratio.

(B) The allowed institutional term deposit collection limit will be increased by 10 percentage points.

(C) The deposit collection limit per institution specified by this bank will be increased by 5 percentage points.

(D) The existing provision that a member of the Board of Directors and a high ranking employee shall not be allowed to join any other organization licensed by this bank for at least 6 months after removal from office shall not be applicable.

Related: Merger/Acquisition By Commercial Banks In Nepal

Agricultural Sector

Agriculture Development Bank will be promoted as a leading bank in the agricultural sector. In order to facilitate the availability of long-term resources in the agricultural sector, NRB will make an arrangement for the bank to issue agricultural bonds.

NRB has made a provision for commercial banks to disburse at least 15 percent of total credit investment in agriculture sector by Ashad end, 2080 BS. In addition, it will modify the method of calculating agricultural credit.

NRB will further simplify the arrangement of buying and selling of agricultural loans (credut swap) by banks and financial instiutions.

Similarly, the central bank will make an arrangement of “Kisan Credit Card” through the Agriculture Development Bank to provide agricultural information to the farmers.

Related: Budget For Agriculture For FY 2077/78

Energy Sector

In order to promote energy self-reliance and to support the Government of Nepal’s target of generating 5,000 MW of hydropower during the Fifteenth Plan period, the central bank has made a provision for commercial banks to invest at least 10 percent of their total credit investment in the energy sector by Ashad end, 2081 BS.

Similalry, commercial banks that have gained investment experience in the energy sector can issue energy bonds. It will facilitate the availability of long term resources in the energy sector and will help the banks and financial institutions with low credit flow in the energy sector to maintain the minimum loan ratio through investment in energy bonds.

Payment system

A national payment switch will be established to further facilitate the payment system by maintaining records of all types of electronic transactions within Nepal.

The central bank has postponed the issuance of new permits other than those payment service operators and payment service providers who have received earlier in-principle consent for the operation.

NRB can revoke the license of Payment Service Provider (PSP) if it has not reached at least 300,000 customers by Ashad end 2078 BS and the average number of monthly transactions has not reached at least 600,000.

You May Also Like: NRB To Close License For New Payment Service Provider

Refinancing

The new monetary policy has increased the refinancing facility. The process of getting such facility has also been made easier. NRB has said that 80 percent refinancing amount will be given to banks and financial institutions. Through such refinancing, banks and financial institutions can provide soft loans of up to Rs 1.5 million per customer to small, home and small enterprises, Rs. 50 million for special and general refinancing and Rs.200 million for general refinancing based on the customer evaluation.

The central bank has made provision to provide up to 20 percent of the total refinancing on the basis of customer assessment. Similarly, NRB has made a provision to provide up to 70 percent through commercial banks, development banks and finance companies and up to 10 percent through microfinance financial institutions.

Similarly, banks and financial institutions will be provided special refinancing in specified areas including export-oriented industries and sick industries at 1 percent interest rate, micro-domestic and small enterprise refinancing at 2 percent interest rate and general refinancing in specified areas at 3 percent interest rate. In such refinancing, the borrower has to pay only 3 percent and 5 percent interest respectively.

Others

The central bank has made a interconnection between the transactions of banks and financial institutions. Until the duration of Covid 19, no charge will be levied if the ATM card of one BFIs is used in another BFIs.

NRB has made an arrangement to provide loan at 5 percent interest from banks and financial institutions to pay the wages of the workers and employees of Corona affected tourism and home, small and medium enterprises and to give the opportunity of entrepreneurship development to those who have lost their jobs in the worst affected areas.

Monetary policy has extended the bank’s loan repayment period by two years. As a result, the borrowers can pay the installment and interest due by Ashad end, 2077 BS until Ashad end, 2078 BS. Monetary policy has fixed the size of the refinancing fund at Rs 100 billion. Earlier, Nepal Rastra Bank had increased it from Rs 60 billion to Rs 100 billion.

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