The Nepal Rastra Bank – central regulatory and monetary authority – unveiled the Monetary Policy in the second week of July with the aim to mobilise credit in the productive sector and stabilise the interest rates in credit and deposits. It has provisioned hedging facility to cover the exchange rate risk of foreign borrowing from local banks and also opened borrowing facility in Indian currency which is expected to augment the loanable funds. The major reason behind high lending rates is lack of loanable funds in banks and financial institutions (BFIs) against the high demand of credit.
Further, the Monetary Policy 2018-19 has envisioned enhancing financial inclusion and developing a robust payment system to take advantage of digital payment and promote electronic commerce. The central bank has been working on developing a payment gateway and regulating digital payment in better way.
In a nutshell, the Monetary Policy has addressed the challenge of credit crunch, consequently the interest rate, and raised the productive sector lending to accelerate the economic growth to achieve the government’s target of 8 per cent growth in FY 2018-19.
How will the interest rate come down
The Monetary Policy has some major interventions to bring down and stabilise interest rates. Interest rates on deposit and credit had simultaneously gone up as banks had started to provide higher interest rate to attract deposits and cater to the credit demand. The weighted average interest rate in deposits and credit hovered at 5.81% and 12.42%, respectively in the first 11 months of fiscal 2017-18, according to the central bank.
To address the situation of credit crunch, which was witnessed in two consecutive fiscal years from 2016-17 and more severely in 2017-18, the central bank has not only opened the facility for commercial banks to borrow from foreign banks but also provided facility of forward contract or hedging to them, which means the fluctuation of the exchange rate will be covered by the central bank’s hedging facility. Another is provision to borrow in Indian currency. “The provision of hedging will further reinforce the banks attempt to avail loan from foreign banks,” says Nara Bahadur Thapa, Executive Director of Nepal Rastra Bank. Banks can avail foreign loan up to 25% of their core capital. Currently, banks core capital hovers around Rs 320 billion and they can borrow up to Rs 80 billion from foreign banks including India, according to Thapa. “This will address the demand based supply of loanable funds and address interest rates.”
Apart from this, NRB has brought down the cash reserve ratio of class ‘A’, class ‘B’ and class ‘C’ financial institutions to 4% for the next fiscal from 6%, 5% and 4% in the ongoing fiscal. This provision will generate additional liquidity of Rs 48 billion in the financial system, which will help bring down the base rate of banks, and ultimately the lending rate, according to Thapa. CRR is the fund that financial institutions have to deposit in the current account of the central bank and henceforth the BFIs can get certain interest rate investing liquid assets to government securities. “The objective is to remunerate idle funds adequately so that banks do not raise long term interest rate to compensate for potential loss in case they are forced to keep idle funds,” said Thapa.
Likewise, statutory liquidity ratio has been brought down to 10% from 12% for commercial banks, 8% from 9% for development banks, and 7% from 8% for finance companies.
The central bank has also tried to encourage BFIs to issue bond/debentures to mobilise resources. They will be allowed to calculate resources collected from sale of bond/debenture in credit to core capital cum deposit ratio from 2018-19. Banks can lend up to 80% of their deposit plus core capital.
The Monetary Policy has given a target to commercial banks to narrow down the weighted interest rate spread, or the difference between lending and deposit rates, to 4.5% by the end of the next fiscal from 5% of the previous fiscal. “Narrow financial intermediation cost will encourage banks to be more efficient and bring down interest rate,” as per Thapa.
While catering to credit demand of the private sector, the central bank expects that credit growth will increase by 20% in fiscal 2018-19.
Ashoke Shumsher Rana, CEO of Himalayan Bank and former President of the Nepal Bankers’ Association has said that the lending rates are expected to come down from existing levels by the end of September this year.
Interest rate stability
The Monetary Policy 2018-19 has raised the lower ceiling and brought down the upper ceiling of the interest rate corridor that is executed in short-term interest rates, like interbank and repo rates. The lower floor of the interest rate corridor has been fixed at 3.5% and upper floor at 6.5%, and the interest rate in short-term monetary instruments will be hooked within the corridor. The upper bound of the interest rate corridor is standing liquidity facility (SLF) rate which the central bank provides to banks if banks face liquidity crisis, and the lower bound is the interbank rate. This means banks will get 0.5% point additional interest in interbank transaction and 0.5% point cheaper interest while availing SLF from the central bank. “The interest rate corridor applied in the short term interest rate is the nominal anchor to stabilise the long term interest on deposit credit,” elaborates Thapa of NRB.
Refinancing facility expanded
NRB has raised refinancing facility to Rs 35 billion from the existing Rs 25 billion to ensure concessional financing in priority sectors. Banks can borrow money from the central bank at 4% and lend at up to 9% in general, and borrow at 1% and lend at 4.5% to export-based enterprises. Borrowers will get subsidised credit under the facility for productive sectors so as to raise the competitiveness of exports. According to the central bank, out of Rs 35 billion announced as refinancing window, Rs 20 billion is funded and remaining Rs 15 billion is non-funded. Central bank has said that it will use the prerogative of the central bank of printing notes to ensure the subsidised credit facility up to the announced amount.
Channelise resources to the productive sector
The central bank has raised the mandatory lending provision for commercial banks in the energy and tourism sectors to 15% and given continuity to the mandatory lending provision in agriculture sector at 10% of their total loan portfolio. On the other hand, the borrowed amount from foreign banks must be lent to the productive sector and infrastructure, and loans under refinancing facility should also be channelised to the productive sector. It is anticipated that when loan of banks are increased in the productive sector, it will spur economic growth.
Stock market woes
A provision has been introduced barring banks and financial institutions from issuing margin call unless the value of shares plunges by more than 20%. Earlier, BFIs used to make margin calls if the stock prices plunged down by 10%.
The margin lending facility (loan against the collateral of stock) has been narrowed down to 25% of the core capital (tier 1 capital) from 40%. BFIs accept stock as collateral calculating the stock value of 180 day average price or current market value of the stock, whichever is lower and provide loan up to 50% of that value.
To promote financial inclusion and formalise the rural economy, the Monetary Policy 2018-19 has made it mandatory for commercial banks to expand branches (at least one commercial bank branch in every local unit) to each of the 753 local units.
Out of 753 local levels, commercial banks currently have presence in 556. To encourage banks to go to remote areas, the central bank has given relaxation that they should not count the deposit collected in remote rural municipalities in cash reserve ratio and statutory liquidity ratio for the next three years.
Highlights of Monetary Policy 2018-19
• Weighted interest rate spread- 4.5%
• Broad money supply – 18%
• Private sector credit growth 20%, total credit growth 22.5 %
• Expansion of refinancing window from Rs 25 bn to 35 bn
• Forward contract facility on exchange rate risk to foreign borrowing of the commercial banks
• Commercial banks can also borrow in Indian currency from foreign banks under the foreign borrowing facility
• Cash Reserve Ratio (CRR) to 4% for commercial and for development banks from 5%
• Statuary liquidity ratio 10%, 8% and 7% for commercial banks, development banks and finance companies respectively
• Commercial banks must float 15% of the total loan portfolio to the energy and tourism sectors
• Full audit of big branches of commercial banks is mandatory
• Credit rating of borrower that utilise credit of Rs 500 million and above is mandatory
• Margin call only if stock prices plunge over 20% of the collateral value
• Margin lending only 25% of the core capital of BFIs from 40% earlier
• Stock broker license to banks, expected to help in developing capital market throughout the country
• Ceiling in overdraft loan at Rs five million from Rs 7.5 million
• Upper floor of the interest rate corridor minimised at 6.5% and lower floor expanded to 3.5%
• Deprived sector lending 5% of the total loan portfolio for class ‘A’ , class ‘B’ and class ‘C’ financial institutions from earlier 5% for class ‘A’ , 4.5% class ‘B’ and 4% for class ‘C’ financial institutions
• Provision to calculate up to Rs 1.5 million loan in group guarantee for women which will be calculated under deprived sector loan and loan to dalit, marginalised community, and include education loan, loan against collateral of academic certificates
• Only one percentage point can be added in published fixed deposit rate to the interest on institutional deposits
• Cap on institutional deposit for class ‘A’, class ‘B’ and class ‘C’ financial institutions. Institutional deposit must be narrowed down to 45% and single institutional depositor limit 15%
• Funds collected by financial institutions through issuance of bond/debenture can be calculated in credit to core capital plus deposit (CCD) ratio
• Ban on stitching Nepali bank notes
• Deposit up to Rs 3 lakhs will be insured from existing Rs 2 lakh
• Issue collateral valuation guidance to keep uniformity in collateral valuation
• Cap on interest of micro finance institutions (MFIs). MFIs can add only six percentage points on their cost of fund while fixing lending rates