KATHMANDU, July 12: Nepal Rastra Bank (NRB) has brought in monetary policy for the upcoming fiscal year 2018/19 with a number of measures aimed at addressing the skyrocketing lending rates in recent months. 

Among other things, the monetary policy statement unveiled by NRB Governor Chiranjibi Nepal on Wednesday has reduced the average difference between the deposit rate and lending rate to 4.5 percent from 5 percent.

This measure implies that a bank would not be allowed to charge higher than 4.5 percent of their average deposit rate. As the central bank is requiring commercial banks to bring the interest spread to 4.5 percent by the end of upcoming fiscal year, the reduction in the spread will put downward pressure on  runaway  bank interest rates. 

“The decision to reduce the spread is positive as we can now expect that it will help reduce the interest rates which have become so high that business firms were unable to afford them,” Shekhar Golchha,  senior vice president of Federation of Nepalese Chambers of Commerce and Industry (FNCCI), told Republica. “We are hopeful that this monetary policy will address the ultra-high and unpredictable interest rates regime in the country,” he added.

Not only has the central bank reduced the interest spread, NRB Governor Nepal also announced that the difference between what a bank pays and charges in interest will be further cut gradually.  

Another way the central bank has tried to put a lid on rising lending rate is by providing banks and financial institutions (BFIs) sources of funds.

The central bank has nearly doubled the size of the refinance fund to Rs 35 billion. The increased size of the fund which was inadequate during the liquidity crunch will ensure that business firms will have financing at a concessional rate of 9 percent. 

“The increase of the fund size will provide relief to business firms and industries in priority sectors,” said Golchha, urging the central bank to also increase the maturity period of such concessional loans. 

The lowering of the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) for banks and financial institutions is another way that the central bank has found for putting downward pressure on the base rate of banks, which is tied to the lending rate. After five years, the central bank has lowered the CRR and SLR. CRR—the portion of the cash deposits that banks are required to park in the central bank vault—has been brought down to a  flat 4 percent  from 6 percent of CRR for commercial banks, 5 percent for development banks and 4 percent for finance companies.

Similarly, the SLR, the reserve requirement including both in cash and government securities, has also been lowered to 10 percent from 12 percent for commercial banks, 8 percent from 9 percent for development banks and 7 percent from 8 percent for finance companies. 

“The reduction in reserve requirements for BFIs will help to free up additional cash in the banking system and ease liquidity,” said Chintamani Shiwakoti, a deputy governor of NRB. “This measure combined with other provisions like reduction in bank rate in the monetary policy will gradually correct the rising interest rates,” he added. The central bank has reduced the bank rate to 6.5 percent from 7 percent.

Bankers agree

“This monetary policy is aimed toward reducing the interest rates that we have been seeing rising rapidly in recent months,” said Bhuvan Kumar Dahal, CEO of Sanima Bank Ltd.  “The base rate will decrease by some percentage points due to reduction of CRR in the monetary policy which means borrowers will benefit,” said Dahal.

The central bank has also announced to provide hedging facility for the foreign currency loans that banks bring to the country to expand into productive sectors.

Such facility will reduce the high hedging cost for banks in the international market which means that the cost for borrowers who benefit from such funds will also go down.

Major highlights

• Inflation to be contained at 6.5 percent
• Private sector credit projected to grow 20 percent 
• Ceiling, floor and policy rates reduced for interest rate corridor system 
• Cash reserve ratio reduced to 4 percent for BFIs and statutory liquidity ratio reduced by 2 percentage points for commercial banks, 1 percentage point for development banks and finance companies
• Bank rate (lending as last resort) reduced to 6.5 percent from 7 percent
• Scope of foreign currency borrowing for banks expanded to borrowing on Indian currency 
• Refinance fund size increased to Rs 35 billion from Rs 20 billion
• Bank can form subsidiary to get license of stock brokerage firm
• Microfinance’s 18 percent cap on interest rate scrapped; can markup 6 percent premium rate in addition to cost of fund and administrative cost 

 
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