Nepal Rastra Bank on Wednesday unveiled the Monetary Policy 2019-20 which analysts and the private sector say contain few policy measures to address the liquidity problem in the banking sector and stabilise interest rate fluctuations.

According to them, the central bank has accorded priority to promoting bank mergers and achieving the government's ambitious growth target of 8.5 percent for the fiscal year 2019-20. They doubted the central bank would be able to handle the volatility observed in interest rates.

Almost throughout the last fiscal year, banks were struggling to manage loanable funds as loans overtook deposit collection. The lending spree led to a mismatch between the growth in deposits and loans. The shortage of loanable funds led banks to engage in an interest rate war, and interest rates soared.

This even prompted the International Monetary Fund to warn that prolonged rapid credit expansion by Nepal’s banks and financial institutions over the last few years could lead to a build-up of credit and liquidity risk.

As part of the effort to stabilise interest rate fluctuations, the central bank has reduced the bank rate to 4.5 percent from 5 percent. The monetary policy also talks about tightening the spread rate and effectively implementing the interest rate corridor to address the problem of interest rate volatility.

The monetary policy has also permitted commercial banks to diversify their sources of borrowing by allowing them take loans from pension funds and foreign hedge funds. Earlier, banks could take loans only from commercial banks abroad.

In addition, the policy has made it mandatory for banks to issue 25 percent of the paid-up capital in debentures by mid-July 2020. Banks have been allowed to collect fixed deposits from foreign citizens and non-resident Nepalis with a minimum maturity period of two years.

Anal Raj Bhattarai, former banker and coordinator of the banking committee at the Confederation of Nepalese Industries, said it would be difficult for the central bank to check interest rate based on the limited tools that it has enforced through the policy.

Private sectors have been demanding the central bank to reduce lending interest rate stating that the high interest rate has increased their cost of borrowing. Bhawani Rana, president of the Federation of Nepalese Chambers of Commerce and Industry, expressed her doubt that the monetary policy could help check the soaring interest rate being charged by the banks.

This time, Nepal Rastra Bank has not revised the cash reserve ratio and statutory liquidity ratio for banks and financial institutions. These tools play a major role in easing the banks’ liquidity position.

The policy is also silent when it comes to revising the threshold in the credit to core capital-cum-deposit (CCD) ratio, which bankers have been pressuring the central bank to address through the monetary policy.

Currently, the CCD ratio imposed for banks and financial institutions stands at 80 percent, which means a bank cannot extend more than 80 percent of its deposit and core capital as loans.

“As the monetary policy has failed to address these issues, it might not help banks to expand their credit,” said Rana.

Kamlesh Kumar Agrawal, vice-president of Nepal Chamber of Commerce, said the effectiveness of the policy can be only realised if it is implemented. “The central bank has not been effective as a regulator, so it will be a challenge for them to actually implement the policy,” said Agrawal.

Despite the controversies surrounding the effectiveness of the policy in addressing the liquidity position and soaring interest rate, the central bank is confident that the policy will help the government meet their ambitious economic growth rate of 8.5 percent this fiscal year.

For the purpose, Nepal Rastra Bank has targeted to expand credit to the government by 24 percent, up from the target of 22.5 percent in the last fiscal year. Similarly, it will be extending the loan amount to the private sector by one percent to 21 percent.

Speaking at the launch of the Monetary Policy, Nepal Rastra Bank Governor Chiranjibi Nepal said the expansion of credit to both government and the private sector could boost the availability of funds to invest in productive sectors. According to him, the government will need to invest Rs450 billion while the private sector needs to inject Rs1.25 trillion in order to achieve the government’s targeted economic growth.

The central bank has also eased the regulatory provisions for banks to merge by mid-July 2020. The policy allows merging banks to maintain the spread rate at 4.4 percent, 10 percent agriculture sector (primary sector) lending and issue date of debentures within the next two years.

Bankers are elated by the Nepal Rastra Bank’s policy on not forcing banks to merge, except in the case of cross holding, in which an individual is in the board of directors of two institutions. “The monetary policy could consolidate banks via merger to stabilise the financial sector,” said Anil Keshari Shah, chief executive officer of Nabil Bank.

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