Monetary policy aims to lower interest rates, ease 'credit crunch'

Published On: July 25, 2019 07:45 AM NPT By: Sagar Ghimire  | @sagarghi

Measures not enough for easing borrowing costs: Private sector

KATHMANDU, July 25: Nepal Rastra Bank (NRB) has introduced its monetary policy for the new fiscal year 2019/20, focusing on making liquidity management more efficient and maintaining interest rate stability.

The central bank's monetary policy released by NRB Governor Chiranjibi Nepal on Wednesday includes a host of measures to ease the existing shortage of lend-able funds at banks and financial institutions (BFIs) and lower interest rates and borrowing costs for businesses.

As part of the efforts to make loans cheaper for priority sectors, NRB has lowered the general refinance rate to three percent from four percent. With these general refinance funds provided by NRB to banks and financial institutions (BFIs) at 4 percent, borrowers in priority sectors like manufacturing, tourism and energy will not be charged more than 7 percent interest .

Amid a shortage of lend-able funds at the BFIs, which has driven up interest rates, NRB has also widened out the sources for BFIs to get funds from abroad. With the implementation of the monetary policy, BFIs will now be able to get funds in foreign currency from pension funds, hedge funds and other sources abroad in addition to the banking sector.

Similarly, BFIs will be allowed to collect deposits on foreign currency from institutions, foreign depositors and non-resident Nepalis, and 100 percent of such deposits with a maturity period of two years can be disbursed as loans.

NRB officials say the new measures will help lower interest rates and address the shortage of lend-able funds.

“The widening of the sources for external borrowings by BFIs will help address the shortage of lend-able funds,” Gunakar Bhatta, the head of Research Department at NRB, told Republica.

“Provisions like reduction of the refinance rate, tightening of the calculation of the interest rates spread formula and lowering the bank rate will help make borrowing cheaper,” added Bhatta.

Another new provision in the monetary policy is the requirement for commercial banks to float debentures equivalent to 25 percent of their paid-up capital by mid-July 2020. The requirement is expected to diversify the source of liquidity for banks that rely largely on deposits to disburse loans.

“One of the reasons for the shortage of lend-able funds in the banking sector was the mismatch in their assets and liabilities as banks used to provide long-term loans from short-term deposits . The requirement of debentures which tend to be of long-term nature will help address the lend-able funds shortage,” said Anal Raj Bhattarai, a former banking executive.

But private sector business leaders are not happy with the central bank's new policy. They say the measures included in the monetary policy are not adequate for making borrowing easier and cheaper.

“The proposed measures are not adequate for addressing the shortage of lend-able funds in the banking sector and lowering the lending rates, which have dampened private sector investment,” said Bhawani Rana, president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI).

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