In a bid to support the productive sector, the Monetary Policy did reduce the refinancing rates for sectors like agriculture and hydropower to six percent from up to seven percent of the past. [break]
The policy has also made it mandatory for banks and financial institutions to issue loans under the facility at rates of up to 9 percent - a move welcomed by the business fraternity.
“But we would have been happier had the central bank made it compulsory for the banks and financial institutions (BFIs) to actively channelize the facility to targeted industries,” said Pashupati Murarka, vice president of Federation of Nepalese Chambers of Commerce and Industry (FNCCI).
NRB has been providing low-rate refinancing facility for last couple of years mainly to export-oriented industries, small and medium enterprises, and agro-processing, tourism and hydropower sectors. However, banks rarely make use of the facility as the existing Nepal Rastra Bank Act allows them to secure such facility for a span of only six months.
“The sectors for which the facility is announced seek long-term investment; hence the central bank´s offer appears hollow, as no entrepreneur expresses eagerness to acquire such loans for a period of only six months," said Rajan Singh Bhandari, vice president of Nepal Bankers´ Association.
While the bankers and business community continued with their long-running debate over the lack of use of the facility, NRB on Wednesday also announced a hike in cash reserve ratio (CRR) something which bankers called a “dampener” aimed at making credit expensive.
Launching the Monetary Policy, NRB Governor Dr Yuva Raj Khatiwada said CRR has now been raised to six percent for commercial banks, 5.5 percent for development banks and five percent for finance companies. Earlier, the CRR stood at five percent for all banks and finance companies.
Bankers worldwide object when CRR is hiked as the idle money kept in reserve do not give any yields. Yet this is one of the most common measures adopted by central banks to absorb liquidity.
In the same line, Governor Khatiwada also said the CRR was hiked to mop up part of excess liquidity in the banking system. But bankers said other measures should have been adopted to reduce money supply.
“The central bank should have resorted to other measures (such as reverse repo) to acquire additional liquidity from the banking system…. The current measure will only increase cost of fund and eventually make credit expensive,” said Bhandari.
Such policy will also affect the central bank´s target of expanding credit by 16 percent this fiscal year, bankers said.
Credit growth stood at 14.1 percent in the first 11 months of last fiscal year ended July 15, despite the banking sector facing a liquidity surplus of around Rs 100 billion. This is same as that of previous year when the banking sector was facing liquidity crunch.
Bankers say demand for loan has fallen sharply because of slump in economic activities, but many entrepreneurs argue this is because of banks´ inability to reduce lending rates along with reduction in deposit rates.
To address the problem of discrepancy in lending and deposit rates, Khatiwada had earlier pledged to introduce interest rate corridor in this fiscal year - under which the central bank was planning to set lending and deposit interest rates and allow rates to fluctuate in between these bands to reduce the volatility in inter-bank rates.
But while introducing monetary policy on Wednesday, the governor did not make any announcement. He only said the plan to introduce the corridor was in “advanced stage”.
“We are currently working on reference rates, laying up groundwork to facilitate overnight payment service and upgrading IT infrastructure for the purpose,” he said.
Among others, the monetary policy has allowed commercial banks to invest up to 30 percent of the amount parked in agency banks abroad in low risk instruments such as call deposit and certificate of deposit.
Likewise, the policy has raised the one-time ceiling of US $25,000 on payment settlement for goods imported from third countries against draft and telegraphic transfer to $30,000. Similarly, individuals and firms, who were earlier entitled to foreign exchange facility of up to $6,000 for various official purposes, can now fetch up to $10,000 from banks and financial institutions.
Among others, the monetary policy has also said the definition of agriculture would soon be made more inclusive, by including agricultural inputs, feeds, irrigation and storage, and selected agricultural product processing units in the sector.
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