Nepal Rastra Bank on Sunday unveiled the country's monetary policy for the fiscal year 2023-24 which has zeroed in on supporting economic recovery, controlling inflation, stabilising interest rates and ensuring credit demand.

The central bank said the monetary policy had transitioned from a “tight, cautious” approach to “easing, cautious” one, supporting growth amid an economic slowdown.

“Economic indicators such as foreign exchange reserve, inflation, liquidity and interest rate are now in a safe zone,” central bank Governor Maha Prasad Adhikari told a press conference after unveiling the new monetary policy.

“The positive results were due to the central bank's corrective measures and timely action in the last fiscal year. The economy is progressing towards recovery,” he said.

The Economic Survey shows that Nepal's annual economic growth rate slowed to 1.86 percent in the last fiscal year ended mid-July.

Inflation, the most critical indicator, dropped at the end of the last fiscal year due to a contraction in domestic demand and price stability in the Indian market, the largest source of Nepal’s imports. India accounts for more than 60 percent of Nepal’s foreign trade.

“This is an ‘easing cautious’ monetary policy to support growth amid an economic slowdown,” said economist Govinda Nepal.

“Nepal’s economy is not sound and secure at present. Despite some improvement in the external sector, the country’s economy is still at risk,” he said, adding that the policy target to utilise loans is a positive step.

“Another important point is that the monetary policy says it will discourage the centralisation of credit as loans were in the hands of a few business houses. It will help to spread out loans among small and medium entrepreneurs.”

Last year, the International Monetary Fund (IMF) flagged concerns about large boom-bust credit cycles in Nepal’s financial sector. That means credit may have grown excessively and borrowers' repayment capacity may have eroded due to high lending rates.

The central bank on Sunday said that although Nepal's credit expansion rate is one of the highest in South Asia, it has not yet been able to achieve a satisfactory level of capital creation in the country.

“The real sector hasn't grown as fast as the credit flow directed at it,” said Adhikari.

Last year, the IMF had asked Nepal Rastra Bank to have some of the country’s largest commercial banks audited by international auditing firms due to doubts about the quality of the loans they have issued, a senior central bank official said.

Representatives of the IMF’s Article IV mission called for the audit to bring clarity about the state of asset quality during a meeting with central bank officials.

“The central bank suspects that there has been misappropriation of the subsidised loans and other benefits provided by these commercial banks,” said Adhikari.

“Therefore, we have asked for independent international auditors to check the books of large commercial banks,” he said. “If any irregularity is found, they will be penalised. Some of the large borrowers are also under surveillance.”

Economist Nepal said that a large percentage of the subsidised loans provided to the private sector during Covid-19 was invested in the share market and real estate.

“A sudden slowdown in the share market and real estate created a credit boom and bust. Borrowers were unable to make loan and interest repayments. This impacted the productivity of manufacturing, construction and trade. It is evident that the subsidised loans were not utilised properly.”

The central bank said the new monetary policy aimed to decentralise credit from a few large borrowers to small and middle-scale entrepreneurs (SMEs).

“SMEs involved in the production sector will get greater priority than SMEs involved in trading,” Adhikari added.

The central bank inserted a provision in the last monetary policy to make the capital-to-risk weighted assets ratio of 100 percent for credit up to Rs2.5 million and 150 percent for credit beyond Rs2.5 million. This ratio is also known as the capital adequacy ratio.

However, the provision will be revised and eased this fiscal year as the economy is progressing.

The maximum threshold of 100 percent capital-to-risk weighted assets ratio will be raised to Rs5 million from Rs2.5 million, the central bank said.

In addition, the capital-to-risk weighted assets ratio will also be brought down from 150 percent to 100 percent for the automobile sector, especially small vehicles and commercial real estate to help them revive.

“The capital-to-risk weighted assets ratio of loans having shares as collateral will also be revised,” said Adhikari.

The central bank will also revise the working capital loan provision within the first quarter as per the recommendations received from commercial banks.

“We will relax the provision depending upon the sectors that have suffered the most,” said Adhikari.

Nepal's economy is yet to recover from the effects of the Covid-19 pandemic and the subsequent Russia-Ukraine war.

“Therefore, the central bank will still have strict monitoring of all financial activities,” said Adhikari.

The central bank said that increased foreign reserves due to higher remittance and lower interest rates are gradually making the country’s economy vibrant.

“This monetary policy will help to achieve 6 percent economic growth by keeping inflation below 6.7 percent,” said Adhikari.

The central bank said that the limit on home loans taken for the first time would be increased to Rs20 million from Rs10.5 million.

It has continued with the provision of giving the interest 1 percentage point higher to Nepali migrant workers [than ordinary depositors] who channelise remittance through the banking system.

Nepal Rastra Bank said it would issue a “stressed loan resolution framework” to restructure the loans of borrowers who are in trouble due to natural disasters and other specific situations.

As per the fiscal year 2023-24 budget, borrowers who take loans from banks and financial institutions exceeding a certain limit must obtain a permanent account number (PAN).

A separate governing body will be set up for effective inspection and supervision of savings and credit cooperatives as mentioned in the budget.

Actions will be coordinated to establish and implement a centralised Know Your Customer (KYC), the mandatory process of identifying and verifying a client's identity when opening an account and periodically updating it.

The central bank said that it would implement the study report prepared by a committee formed to study the problems of microfinance institutions.

The merger and acquisition of micro-finance institutions will be encouraged by providing incentives if they operate integrated transactions till mid-July 2024.

Due to the surplus liquidity among banks, Nepali citizens going to India or other countries will be provided with exchange facilities for up to $2,500 twice a year, up from the existing $1,500 per person.

To encourage investment in the productive sector, the central bank has reduced the policy rate, the rate at which it lends to banks, to 6.5 percent.

Dhruba Thapa, president of the National Automobile Dealer’s Association (NADA), said the new monetary policy had made the private sector excited. He said it had addressed some of the issues raised by auto traders.

“The central bank’s decision to review the capital-to-risk weighted assets ratio for hire purchase and real estate loan, working capital loan and so on, will make the market vibrant to some extent,” said Thapa.

“But the current provision will benefit only entry-level vehicle buyers. Therefore, it's doubtful whether the problems of the entire automobile sector, which is one of the major sources of government revenue, will be addressed.”

But Thapa is optimistic that the progress in the stock market and the automobile and real estate sectors will have a ripple effect on the entire economy.