Nepal Rastra Bank (NRB) issued the monetary policy for the current fiscal year 2019/20 last week. One of the major expectations of the private sector from the central bank’s monetary policy was measures to check the skyrocketing interest rates of bank and financial institutions (BFIs). This upward trend of the interest rates of BFIs for last two years not only dampens the private sector confidence but also risks raising the prices in the market when the higher production cost is eventually passed on to the consumers. Taking this concern into consideration, the NRB has said that a focus of the monetary policy for the upcoming fiscal year will be on making the liquidity management more effective for the stability of interest rates.
While the upward march of the interest rates has subsided in recent months, they are still at very high level. The monetary policy has announced some measures toward addressing the liquidity problem in the banking industry and help ease the pressure on the interest rates. In addition to that, the monetary policy also includes some provisions that will help in lowering the borrowing costs in some priority sectors. The NRB will be lowering the general refinance rate to three percent from four percent and the maximum lending rate that a bank can charge to borrower has been capped at seven percent. This means that the priority sectors like energy, exports and agriculture will be getting the loan facility refinanced by NRB at seven percent, down from eight percent earlier. Another measure that the central bank has announced in the monetary policy is to further reduce the interest rates spread cap for commercial banks to 4.4 percent. This is also expected to lower interest rates as tendency to offer lower interest rate on deposit would also bring down the lending rate due to the maximum difference between the average deposit rate and lending rate. Some other measures include expansion of the scope for BFIs for the external sector borrowing.
As the shortage of lendable fund is the main culprit for the skyrocketing interest rates, the relaxation for banks to get funds on foreign currency from more sources like hedge funds may ease the acute shortage of loanable funds in the banking sector. 100 percent of deposits collected in foreign currency from non-resident Nepali with the maturity of at least two years will be allowed to disburse as loans compared to a certain percent—nearly 20 percent—of buffer that a bank must maintain in terms of mobilizing deposits as loans. The requirement to issue debentures equivalent to at least 25 percent of paid-up capital is also aimed at diversifying the sources of loanable funds for banks that largely rely on deposits. But, are these provisions adequate to ease the shortage of lendable fund and lower interest rates in the market? They are not. These measures fall short in curbing the interest rates which have climbed to one of the highest levels in the history. The possibility of the correction of interest rates looks remote as these measures do not ensure that banking industry will get the funds and deposits adequate enough to be disbursed as loans. The loan demands are likely to go up further in the current fiscal year while there is no credible basis to believe that the growth of the deposit volume will match it. There will be further pressure on the interest rates. While the NRB should do more to lower interest rates, the private sector should also be mindful of the reality that the time for enjoying the loans at cheaper interest rate of around six percent is now over.ort of fixing interest issue