Key highlights of Monetary Policy FY 2020/21

The governor of Nepal Rastra Bank (NRB), Maha Prasad Adhikari presented the monetary policy for the fiscal year 2020/21 on 17 July that targeted an annual economic growth rate of 7 percent and consumer price inflation rate no higher than 7 percent. The monetary policy aims to address the economic effects of COVID-19 and provide relief to various sectors affected by the pandemic.

Major Highlights of the Monetary Policy:

1. The new monetary policy has increased the credit to core capital plus deposit (CCD ratio) to 85 percent from previously maintained 80 percent. This will allow banks to issue more loans and advances against deposits as 5 percent lesser is required to be set aside as a reserve to maintain liquidity.

2. Extension of loan repayment and grace period

The policy has extended the period of loan repayment for business enterprises that have been affected by the pandemic. The central bank has set a loan moratorium on principal and interest payments for businesses severely affected during the crisis until one year, partially affected borrowers until 9 months, and limited impacted businesses until 6 months. It has also permitted banks and financial institutions (BFIs) to extend further loans to industries affected by the pandemic by 20 percent of working capital maintained at mid-April. The policy has also increased the grace period on loan repayments as the lockdown had affected the construction work of several projects. Sectors most affected by the pandemic by the pandemic will get a grace period extension of one year. For the hotels accommodative of tourists, arrangements will be made to extend the grace period by two years.

3. Revision of refinancing facility and minimum investment in terms of loans to priority sectors

The new policy has revised the minimum investment in terms of loans to priority sectors and increased the range of refinancing facilities to increase access to such subsidized loans. As per the policy, export oriented-businesses and sick industries will get refinancing facilities at a maximum interest rate of 3 percent, while SMEs will avail credit at a maximum interest rate of 5 percent. The policy requires commercial banks to invest at least 15 percent of their loan portfolio in the agricultural sector, 15 percent to small, medium-sized enterprises, and 10 percent to the hydropower sector.

4. Provision for a cap on the distribution of cash dividends for BFIs

For the BFIs, the policy has introduced a cap on the distribution of cash dividends. For BFIs with a distributable profit lower than 5 percent of their paid-up capital, distribution of cash dividend is prohibited. Similarly, for BFIs with a distributable profit higher than 5 percent of their paid-up capital, distribution of 30 percent of dividends as cash dividends is permitted. However, such companies cannot distribute cash dividends exceeding their deposit weighted average maintained in Asadh 2077.

5. Restricted BFIs on charging various service fees

The central bank has barred banks and financial institutions from charging excessive service fees. While commercial banks can now take only 0.75 percent service charge while issuing loans, development banks and finance companies can take only 1 percent and 1.25 percent service charge from borrowers, respectively. In addition, the central bank has prohibited banks from charging the public for interbank ATM withdrawal until the COVID-19 crisis is over.

6. Encourages mergers between BFIs

The monetary policy promotes mergers between BFIs. It has announced that it would allow merged entities to collect 10 percent more corporate deposits than the fixed cap. Moreover, for the promoters and chief personnel of the merged entities, the cooling period will not be applicable. To address the already saturated microfinance sector, the monetary policy has halted the issuance of licenses for new microfinance companies. Any microfinance license already under the process of issuance has also been abandoned.

Others highlights of the monetary policy include the following:

• The repo rate has been reduced to 3 percent from 3.5 percent.
• The cash reserve ratio to be maintained by the BFIs is kept intact at 3 percent. Similarly, the statutory liquidity ratio to be maintained by commercial banks, development banks, and finance companies has been kept intact at 10 percent, 8 percent, and 7 percent respectively.
• A liquidity facility rate of 5 percent will be maintained as the upper limit of the interest rate corridor.
• The deposit collection rate, which has been established as the lower limit of the corridor will be reduced to 1 percent from previously maintained 2 percent.

Thoughts on the policy

The highly anticipated monetary policy has addressed the revival of the COVID-19 affected economy by unveiling rescue packages. The policy inculcates a positive state of expectation for the pandemic-hit economy. It is in alignment with the annual budget, providing relief and rescue to businesses. The policy has been well received by the private sector as it addresses the key sectors for economic revival. The policy aims at easing liquidity and promoting stability and sustainable economic growth in the country.

The positive aspects of the policy

The monetary policy prioritizes agriculture, energy, and small and medium-sized enterprises. For the first time in the history of monetary policy, the central bank has prioritized cottage and small industries. These crisis hit businesses been provided with relief packages and policies including the extension of loan repayment deadline, refinancing, and targeted lending.

The borrower-friendly monetary policy has addressed the needs of the business community by ensuring increased liquidity and easy access to credit. The policy largely mentions extension in loan repayment, grace period extension, and refinancing. The tourism sector that has been drastically affected by the pandemic is eligible for facilities announced under the recovery plan which include easy loans from BFIs, relief credit, and refinance.

Mergers and acquisitions have been promoted in the banking sector. The policy lays down some incentives to facilitate mergers. Likewise, the issuance of new licenses for microfinance companies has been forbidden in the overly saturated sector, which is commendable as it would ensure healthy competition and a controlled financial system in the nation.

The monetary policy has also relaxed the provisions regarding provisioning in case of loan extensions for the virus affected sector. This comes as a huge relief to the banking sector.  The central bank has also opened doors for reviving a business through new investments by way of private equity funds, venture capital, debt-equity conversion, and special purpose vehicles. Overall, the monetary policy has introduced measures that are favorable to doing business despite the effect of pandemic and lockdown.

What could have been done better and the road ahead

The policy aims to achieve an annual growth rate of 7 percent, which seems fairly unrealistic given the impact of the pandemic and the nation-wide lockdown. Moreover, the monetary policy has failed to address the need for an exit policy through a waiver of interest. It fails to consider that certain businesses are in no position to revive. The policy is also ambiguous regarding the amount of the refinancing package.

The policies and provisions laid out in the new monetary policy sound promising, but the real struggle would be its fast-tracked implementation. The policy looks good on paper, but the question regarding its implementation remains. To make the policy successful its implementation and careful monitoring of execution are equally important. Looking forward, the central bank should focus on speedy implementation of the monetary policy which will in return ensure economic revival and stability.