Monetary Policy for Fiscal Year 2017/18

NRB raises productive sector lending requirement to 25%

Published On: July 10, 2017 05:00 AM NPT By: Sagar Ghimire  | @sagarghi

·Aims to contain inflation at 7 percent  
·Targets 20% of private sector credit growth, 27.8% domestic credit growth
·People can deposit money in their account from any bank branch
· BFIs to get Rs 10 million interest-free loans for a year for each 2,500 accounts opened
  Rs 10 million interest free loans for a year to BFIs opening branch in unbanked local units

·Margin loans ceiling fixed at 40 percent of core capital 
·Banks required to lower share of institutional deposits to 45 percent by mid-July, 2018

KATHMANDU, July 10: Nepal Rastra Bank (NRB) has raised the lending requirement for commercial banks toward productive sectors by 5 percentage points to 25 percent of their total lending. 

Unveiling the Monetary Policy for Fiscal Year 2017/18 in Kathmandu on Sunday, the central bank said that the 'A' class commercial banks must float 25 percent of their total loans to productive sectors by mid-July, 2018.  

By increasing productive sector lending requirement, the central bank has disseminated a message that it wants the banking industry to channelize more resources into priority sectors like agriculture, energy, tourism and small and medium enterprises, which are the major sector of economic activities, to support the economic growth target of the government. 

According to the central bank, the 25 percent directed lending requirement includes 10 percent in agriculture sector, 5 percent in hydropower, 5 percent in tourism and remaining 5 percent in other sectors prescribed by the NRB as productive sectors.

Commercial banks were earlier required to float 20 percent of their total lending in productive sectors, including 15 percent credits on agriculture and energy sector combined. 

In line with the demand of the banking executives and the private sector leaders, the central bank has also expanded the definition of productive sectors to accommodate pharmaceuticals, cement and garment, among other industries, as productive sectors.
However, there are doubts on whether banks will be able to increase productive sector loans as they are struggling to meet the existing requirement of 20 percent. 

"T“e policy of increasing productive sector lending requirement is good. But the implementation is more important than the policy announcement. As banks are failing to meet the existing requirement, there are doubts that banks will channelize additional resources in the productive sector," ”eependra Bahadur Kshetry, a former NRB Governor, told Republica.

Refinance fund increased to Rs 20 billion
Similarly, the central bank has also increased the size of refinance fund so that priority sectors can borrow money from BFIs at a cheaper or subsidized rate. 

The size of refinance fund has been increased to Rs 20 billion from Rs 10.84 billion in the current fiscal year. 

In the current fiscal year, the central bank has run out of cash stocks at the refinance fund as more businesspersons lined up for cheaper fund in the wake of skyrocketing interest rates and shortage of lendable fund in the BFIs. 

Private sector leaders had demanded that the central bank increased refinance fund to at least Rs 100 billion. 

Direct lending to deprived sector provision scrapped 
Meanwhile, commercial banks have received some policy gifts through the monetary policy. 

The NRB has scrapped the requirement to lend 2 percentage points of 5 percent lending to the deprived sector directly by themselves. Such requirement, which was introduced in the monetary policy for the current fiscal year, had drawn stiff criticism from bankers who argued that they do not have structure and expertise to lend to deprived sector on their own.

Now, they will have flexibility of channelizing such lending through microfinance development banks. 

Similarly, the NRB has also allowed commercial banks a deadline of mid-October to bring their core-capital-cum-deposit (CCD) ratio requirement to the regulatory limit of 80 percent. While the NRB allowed the regulatory relief on calculation of the CCD ratio by deducting 50 percent of productive sector loans to expire, the flexibility of the deadline to bring the CCD ratio to regulatory limit means that BFIs would not be penalized for breaching such prudential lending limit until mid-October. 

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