The Nepal Rastra Bank (NRB) unveiled the new monetary policy for FY 2021/22 on 13 August 2021. This monetary policy aims to maintain consumer price inflation within 6.5% and grow private sector credit by 19% in FY 2021/22. The policy shares the same focus as the previous monetary policy, by concentrating its efforts on the economic recovery from the COVID-19 pandemic.
Major Highlights of the Monetary Policy
Relief to businesses affected by COVID-19
For sectors that have been hard hit by COVID-19 such as restaurants, party palaces, public transport, educational institutions, and entertainment companies, NRB has extended the loan repayment and interest payment deadlines by one year to mid-January 2023. The loans can be paid back in four installments. The loans given to such sectors where the interest matures in mid-July 2022 must be separately accounted for by the Banks and Financial Institutions (BFIs) and no fines and penalties must be levied on such accounts. The provision of restructuring and rescheduling of loans for the enterprises operating in these highly affected sectors will be available by mid-January 2022. For the enterprises operating in the transport sector, loans of up to NPR 200,000 per vehicle will be available for maintenance and operation of public transport.
Changes in provisions for BFIs
The credit-to-core-capital plus deposit (CCD) ratio has been replaced by Credit-Deposit (CD) Ratio. A CCD ratio indicates a BFI’s ability to convert deposits and core capital into loans whereas a CD ratio shows the ability to cover loans solely from its deposits. NRB is yet to issue a directive for the use of the CD ratio. The BFIs must maintain a CD ratio of 90%, which previously was a CCD ratio of 85%. The CD ratio should not be higher than 90% until mid-July 2022. According to Ghimire, the average CD ratio for banks was 78.74% in the 3rd quarter of FY 2020/21 with NIC Asia having the highest CD ratio at 84.21%. Only 10 out of 27 commercial banks were able to achieve a CD ratio higher than 80% in the 3rd quarter. Similarly, according to the NRB data for 11 months of FY 2020/21, deposits grew 20.8% and private sector credit grew 26.3% on a year-on-year basis in mid-June 2021.
In case of loan amount exceeding NPR 2 billion, BFIs will have to go into a co-financing agreement. Previously, BFIs would need a co-financing agreement for loan amounts exceeding NPR 1 billion.
If a borrowing institution is at a loss for the past three years continuously, the institution must be categorized under their watch list. Previously, organizations in a loss for two continuous years would be in this category. The Repo rate, which is the rate at which the central bank lends to commercial banks, increased from 3% to 3.5%. The Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), which determines the number of funds that BFIs can lend out, have remained unchanged at 3% and 10% respectively.
Incentives available to BFIs for Mergers and Acquisitions
Incentives are available to commercial banks who complete or are in the process of mergers and acquisitions in FY 2021/22 until mid-July 2023. A discount of 1% is available on the SLR and 0.5% on CRR for one year of integrated transactions. Institutional fixed deposit limit and Individual institution’s deposit will be increased by 5%. A cooling period of 6 months will not apply to the board of directors and senior officers of such commercial banks. The spread rate can exceed up to 1% of the permissible limit of 4.4%. If the loan-deposit ratio exceeds the limit in integrated transactions, one year period will be given to manage it. After a joint operation, permission from NRB is not required to close branches within a 1 km distance given that at least one branch is not closed.
If a wholesale microfinance institution merges with a retail microfinance institution, the consolidated entity can operate in retail as well. Micro-finance institutes with holdings in commercial banks, development banks, or finance companies are required to merge/acquire by mid-July 2022.
Electronic Transaction Promotion Year
NRB has declared FY 2021-22 as “Electronic Transaction Promotion Year”. NRB is focused on developing necessary infrastructures to interlink digital payment tools and establish a national payment gateway to introduce payment cards. A review of the transaction limit set for digital payment tools will be conducted along with reducing the tariffs imposed on digital transactions. NRB will also facilitate government agencies to receive money via electronic payment with plans to enable social security payments through an electronic transaction system
Refinancing and restructuring
The refinancing scheme introduced in the previous monetary policy will be continued under the same limits, prioritizing micro, small and medium enterprises. The deadline of payment for customers who were unable to pay EMIs during the lockdown can be extended, following an evaluation from the lending BFIs, to mid-January 2022 from mid-July 2021. NRB has offered to provide over NPR 200 billion in refinancing facilities.
An entity or individual can take margin loans, with shares of public companies as collateral, of up to NPR 40 million from one BFI and NPR 120 million in total. The margin lending percentage has remained unchanged.
Deprived Sector Loan Scheme
BFIs need to lend at least 5% of their lending to the deprived sector. The loans eligible for the deprived sector loan scheme has been updated to include the following:
- The loan of up to NPR 1.5 million taken by people unemployed in the Tourism Sector due to COVID-19 who wish to become self-employed
- The loan of up to NPR 2.5 million taken by people self-employed in Agriculture to purchase a vehicle
- The loan of up to NPR 2 million taken by self-employed women, and women involved in a cottage industry to run their businesses
The NRB has implemented an expansionary monetary policy to stimulate business activities and encourage consumer spending. The monetary policy has outlined several reliefs for the revival of the economy from the impacts of COVID-19. With the deadline for interest and loan repayments extended, and loan restructuring provisions on the way, the businesses most affected by the pandemic may slowly be able to return their operations at least to their previous level.
Credit-Deposit ratio requirement has been increased to encourage BFIs to grant more loans to increase the money supply. The increase in credits and deposits of BFIs in the past fiscal year shows that NRB’s decision to increase the CD ratio has increased lending in the previous financial year and so it is reasonable to expect that this year’s monetary policy will increase BFI lending as well. With the increase of the Repo rate, any inflation arising from the growing economic activity will be minimized.
The NRB has been introducing incentives to BFIs for encouraging mergers and acquisitions for the past few financial years to strengthen their capital base and increase their risk-bearing capacity. Mergers and acquisitions of weaker banks by stronger banks are expected to achieve efficiency through economies of scale. The mergers and acquisitions between commercial banks in Nepal have not taken place as much as NRB had hoped. The upcoming merger of Nepal Investment Bank Ltd. and Himalayan Bank along with the incentives added by NRB might encourage at least a few commercial bank mergers in the upcoming years. The number of development banks has almost been halved compared to 2019 due to several commercial banks acquiring development banks. NRB’s new requirement will further reduce their numbers.
The NRB is currently unclear on the deadline for current investors who have taken loans higher than the limit set by the new monetary policy to bring their loan within the limits, so this new policy seems to apply to new investors only for now. This policy might also increase smaller investor’s access to margin loans as more funds will be available for them. The NEPSE has been on a bullish trend for over a year despite the pandemic’s devastating effect on businesses. This unsustainable bullish run is expected to become bearish in the nearby future, and a decrease in the number of margin loans available to an individual or entity will help reduce their risk during a downward trend.
The monetary policy for FY 2021/22 makes great promises for the economic recovery from the impacts of COVID-19. Quick implementation of these policies along with frequent monitoring and assessment is required to achieve the desired outcome.
 The directive on the CD ratio is yet to be published.