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New Monetary policy aims financial stability
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New Monetary policy
WM Correspondent
The recently announced monetary policy for the current fiscal year has banned the commencement of new banks in order to improve the quality of banks.
Those willing to open commercial banks and those who want to upgrade their financial institutions into ”A class" will have to wait for indefinite period. NRB governor Yubaraj Khatiwada made it clear during the unveiling of the policy that the central bank would continue to close doors for new banks and financial institutions (BFIs) until the economy takes a certain shape from the current financial volatility. .
However, those banks and financial institutions (BFIs) targeting infrastructure development with the joint venture with foreign companies and with huge capital and superior technology will however be welcomed. There are already 28 banks in operation and other three are in the pipeline.
The central bank for the first time will encourage the system of stress testing in the Nepali banking system which would predict the impacts of economic ups and downs in the financial system.
The central bank has also prevented the promoters of BFIs with more than 1 percent share to take loans by putting more than 50 percent shares as collateral. Both the central bank and International Monetary Fund (IMF) have argued that this provision will help to strengthen the corporate governance.
Nevertheless, bankers have insisted that the promoters should be allowed to put their assets as collateral if any bank accepts such collateral.
The policy, unveiled by the central bank, also bars the BFIs from making more than 10 percent of their total lending into the real estate sector. And, those BFIs which have already lent more than 10 percent should bring down the size of credits below 10 within the next two years.
But, the money go up to 30 percent for the housing sector as the maximum limit for housing and real estate sector has been fixed at 40 percent. It is reverse decision on the part of the central bank given that the real estate developers were free to get up to 25 percent loans while housing developers could only get up to 15 percent only. However, NRB officials said the housing could be categorized even as land development for housing projects which has fallen under real estate so far.
The housing developers were demanding similar treatment and the central bank has addressed it. However they will also be affected because most of them are also involved in real estate trading as well.
The policy also sought to make balance of payment (BoP) positive at Rs. 9 billion this year which is currently negative by around Rs. 5 billion.
The BoP deficit reached to more than Rs. 22 billion, the record high deficit in the last 26 years. Even the growing remittance also could not sustain the BoP due to growing trade deficit as a result of declining exports against soaring imports. That's why; the government and the NRB had to take import curtailing measures regarding the products such as gold and silver.
Likewise, the new monetary policy aims to maintain the inflation at 7 percent. It is doubtful if the central bank could be able to maintain price rise of goods and service at 7 percent because it has failed to maintain it at single digit for the last two consecutive fiscal years. NRB has also been maintaining that the economic factors such as bands, strikes and syndicates are responsible for high inflation.
With the political situation still volatile, the non-economic factors will again be major factors determining the price rise. On the other hand, experts also point out that the targeted circulation of money at 15 percent will not be able to tame inflation. The excess money at the hands of people creates high demands contributing to price rise.
In order to promote exports, the new monetary policy has given certain facility in foreign exchange allowing the firms to export goods more than worth US$ 500,000 at a time from existing US$ 200,000. Deposit amount that the exporters should guarantee on the basis of bank guarantee or cash against document (CAD) has also been slashed to 1 percent form the existing 5 percent.
The interest rate for refinancing credits from the central bank has also been slashed to 7 percent from existing 7.5 percent on which the BFIs can not charge more than 10 percent interest to their customers. The NRB will direct the BFIS to double their lending to the productive sectors such as agriculture, energy, tourism and small and cottage industries within the next three years.
In order to expand the financial services to the needy people, the NRB will be flexible regarding the expansion of expanding presence of financial institutions by enabling "D" and "C" class FIs to venture into some 30 districts with low financial access.
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