the HRM
A midst the current economic slowdown, Nepal Rastra Bank (NRB) – the central regulatory and monetary authority – has unveiled an accommodative Monetary Policy for Fiscal Year 2024/25 to boost production, create jobs and stimulate economic activities through the expansion of private sector credit by 12.5 percent against around 5 percent of FY 2023/24. It has provided relaxation to borrowers and banks in many ways addressing the concerns of the private sector, which had been accusing the central bank for the economic slowdown due to its stringent policy measures.
After inducting a contractionary Monetary Policy for two consecutive years, Nepal Rastra Bank has partially softened its stance, reportedly, to support the country’s economy to take a leap. However, experts have criticised the central bank for compromising with financial sector stability by tinkering the prudential norms related to the provisioning of loss/bad loans, loan classification and loan loss provisioning, among others.
Private sector leaders have said that the Monetary Policy 2024/25 has embraced various provisions to support contractors, who have been in financial crisis due to the delay by the government in clearing the outstanding dues. Micro, small and medium enterprises (MSMEs) can also enjoy cheaper credit to accelerate their businesses.
The Monetary Policies introduced in two consecutive fiscal years 2022/23 and 2023/24 were deemed to be the most rigid in NRB’s 22-year history of formulating Monetary Policies starting from Fiscal Year 2002/03. However, Nepal Rastra Bank Governor Maha Prasad Adhikari has claimed that the central bank has been gradually relaxing the stringent provisions through the quarterly reviews of the Monetary Policy from the mid-way of the previous fiscal 2023/24.
Banks and financial institutions (BFIs) that are flush with liquidity are eager to expand loans as the credit interest rate has dropped to the lower territory as their cost of deposit collection has gone down substantially. Interest rate on savings accounts is at rock bottom due to excess liquidity in BFIs. Against this backdrop, the Monetary Policy 2024/25 aims to orient credit flow to the productive sector to provide support to achieve 6 percent economic growth target set by the Fiscal Budget 2024/25.
More facilities to contractors
Contractors, who have been lodging grievances with the government for not settling their outstanding dues have been provided some relaxation measures by the Monetary Policy. Construction companies in Nepal have been going through a difficult time as the government has yet to settle dues of around Rs 40 billion. Further, the government has refused to extend the timeframe for 1,800 projects worth a contracted amount of Rs 400 billion, according to Ravi Singh, President of Federation of Contractors’ Associations of Nepal (FCAN). Nepal Rastra Bank has addressed the genuine concerns of the contractors through the Monetary Policy. Construction companies have been granted extension of five months to repay the principal and interest of the credit they had obtained. Also, contractors will not be blacklisted on the basis of ‘bounced cheques’ until the next provision regarding the credit information. The central bank has taken a soft stance with respect to credit rating. “While obtaining credit beyond the limit of the financial statement, the threshold of the amount that requires mandatory credit rating shall be revisited,” states the Monetary Policy.
If the government renews the construction contract period that it had previously refused then the bank guarantee will also be renewed. Moreover, if any company that has formed a joint venture is blacklisted, it will not affect other partners of the joint venture in making banking transactions. Credit liabilities created from the claim of bank guarantee will be classified as other credits and same loan loss provisioning shall be applicable in these credits. Er. Ang Dorji Lama, Senior Vice President of FCAN, said that the Monetary Policy has given life to the construction industry which was grappling with an adverse situation. “The government has pushed the construction industry which creates a multiplier impact on the economy to the verge of collapse,” he said, adding, “However, the provisions of the Monetary Policy are short-term remedies. Unless the government addresses the issue of outstanding dues and contract renewal, it will be tough for construction companies to come back.”
MSMEs credit with interest rate stability
The Monetary Policy has given high priority to micro, cottage, small and medium enterprises (MSMEs). Considering the small ticket size of loans for MSMEs, the central bank has announced it will review the threshold amount from the existing Rs 10 million. Moreover, to avoid the challenges faced by MSMEs due to interest rate volatility, the Monetary Policy has offered them a stable interest rate barring the BFIs from charging more than two percentage points premium on top of the base rate or the MSMEs can enjoy a more or less fixed interest rate (base rate + 2%). Moreover, NRB will reportedly revisit the list of eligible industries adding ancillaries of agro-based industries, ICT, tourism and sectors of domestic production onboard. Earlier, only MSMEs with a capital base of Rs 20 million including agriculture and industries using domestic raw materials were eligible under this scheme. Revisiting the ticket size is expected to improve credit flow in the MSMEs sector. Banks are not able to meet the requirement of issuing 15 percent credit from their loan portfolio to MSMEs by mid-July 2027. Though the government-owned banks have made remarkable progress on this, most of the private sector banks are not able to achieve the credit flow requirement as instructed by NRB. In addition, the central bank had instructed BFIs to lend 15 percent of the total loan portfolio to agriculture sector by mid-July 2023 and 10 percent to energy sector by mid-July 2024, however, the target is largely unmet.
Due to low investment in the energy sector, the Monetary Policy has allowed BFIs to meet the credit follow requirement in the energy sector by purchasing bonds issued by specialised organisations investing in the energy sector. The amount of bond purchase shall be considered as their investment in energy. The central bank has emphasised that it is not necessary that all banks have expertise to invest in the energy sector and their credit flow in energy could remain low to meet the requirement of 10 percent investment in energy, so banks can simply purchase the bonds issued by specialised organisations investing in the energy sector.
Liberal approach in foreign exchange facility
Nepal Rastra Bank has taken a more liberal approach in terms of providing foreign exchange facility. The central bank, as the custodian of foreign exchange reserves, had taken a restrictive measure including hundred percent cash margin to open letter of credit (L/C) and had also restricted the import of 10 types of commodities with the support of the government due to the sharp decline in foreign exchange reserves about two years back. The situation of foreign exchange reserves has improved along with increased remittances inflow as well as a slump in imports. According to Nepal Rastra Bank, the country has gross foreign exchange reserves of USD 14.72 billion (Rs 1,967.19 billion) by the end of mid-June 2024, which is sufficient to cover the merchandise imports of 15.1 months and goods and service imports of 12.6 months.
The Monetary Policy has announced to offer foreign exchange facility of up to USD 50,000 to import goods using draft and telegraphic transfer as a mode of payment from the earlier restriction of USD 35,000 and up to USD 100,000 to import under document Against Payment and Document Against Acceptance compared to USD 60,000 earlier. Moreover, the foreign exchange facility for travellers against the submission of visa and ticket will be revisited along with the amount that can be spent from the convertible currency accounts maintained in Nepali banks. The Monetary Policy has further stated to provision annual threshold of foreign exchange facility under different segments of service imports along with providing exchange facilities to more foreign currencies to facilitate remittance inflow, travel and trade, among others.
Moreover, the threshold of draft and telegraphic transfer will not be applicable in government procurements and different modes of payments shall be used in public procurement related imports.
BFIs and borrowers have more to cheer
Considering the pressure on capital fund, the Monetary policy has provided some facilities to BFIs. Loan loss provisioning of banks and financial institutions has been brought down to 1.10 percent from 1.20 percent. This provision will reportedly help in increasing the profits of BFIs. In addition, the Monetary Policy has announced to reduce the risk weight for credit sale and purchase. Likewise, Regulatory Retail Portfolio (RPP) has been increased from Rs 20 million to Rs 25 million. Moreover, abiding by the Capital Adequacy Framework 2015, suitable reserves amount of the regulatory reserve shall be taken into Tier 2 capital calculation, however, the total capital fund should not exceed double the amount of Tier 1 capital, according to the Monetary Policy 2024/25. The central bank has introduced this scheme to minimise the pressure of capital fund on banks. However, Tier 2 capital is less concerned with the solvency issues of banks and financial institutions.
Credit classification is another area of intervention by the Monetary Policy. If debt servicing is regular, despite the temporary closure of an industry or enterprise due to some circumstances, classification of such loans and loan loss provisioning will be considered as good loan. Moreover, if the debt servicing of loss/bad loan comes to regular shape, such loan shall be classified under watch list for six months prior to classifying that under pass/good loan category. Under the watchlist category only 5 percent loan loss provisioning is required.
Further, the central bank has hinted it will review the existing provisions of bank account suspension based on bounced cheques; it will be duly revised by reviewing the existing credit information and blacklisting related provisions. The recent monetary policy has introduced a provision to exclude venture capital and private equity funds from being blacklisted, even if the companies they invest in default on their debts. This relaxation of rules aims to encourage investment in these sectors.
Banks and financial institutions are allowed to count credit and interest recovered until mid-August 2024 in the income statement of the previous fiscal 2023/24, which ended in mid-July 2024.
Moving ahead, Nepal Rastra Bank has decided to hold the enforcement of credit adjustment through Variance Analysis provisioned in the Working Capital Guidelines till the end of this fiscal. The private sector was urging the central bank to defer the working capital guideline enforcement. “Though working capital guideline has a rational, Nepal Rastra Bank has introduced it at the wrong time when the country is grappling with economic slowdown,” said Rajesh Kumar Agrawal, President of Confederation of Nepalese Industries (CNI). He further said that the working capital guideline and asset classification guideline have triggered the slowdown, which is why, it would have been a wise decision by the central bank to keep that on hold for some time; the Nepali economy cannot bear with such forceful decisions.
Along with this the Monetary Policy has announced to formulate the draft Bill regarding Establishment of Asset Management Company for asset management or asset reconstruction in the context of rising non-performing and non-banking assets.
Speculations and stock market rally
The stock market has continued to rally since the formation of the new government. When the Monetary Policy was announced with the new provisions of loan loss provisioning, loan classification including the ambitious credit growth target, the stock market continued to rally except for a major correction on a single trading day after two weeks of the Monetary Policy being unveiled. The stock price of banks has gone up due to an expectation of the provisions of the Monetary Policy being favourable to increase the profits of banks. Currently, per day transaction has crossed Rs 20 billion.
Nepal Rastra Bank has removed the Rs 200 million cap on credit that banks and financial institutions can extend to institutional investors for margin lending. However, the existing Rs 150 million limit for individual investors remains unchanged. Nepal Rastra Bank has said it will gradually shift and minimise the credit flow of BFIs in the stock market by encouraging margin trading. It has issued approval to 34 stock brokers for margin trading. Under this provision, stock brokers are eligible to provide loans to stock market investors, however, margin trading has not been introduced in a big way. Once margin trading becomes effective, Nepal Rastra Bank will gradually minimise margin lending from BFIs.
Reversal of reforms!
At a time when Non-Performing Loan (NPL) has risen to 4 percent in fiscal 2023/24 from 1.5 percent of 2022/23, Nepal Rastra Bank has taken soft measures on loan loss provision and loan classification. Moreover, it has deferred the enforcement of Working Capital Guideline for a year. “Nepal Rastra Bank has taken a reverse gear from its reform initiatives introduced in recent years for the stability of the financial sector,” said Anal Raj Bhattarai, financial sector analyst. The central bank has revised the loan loss provisioning in pass category loan from 1.20 percent to 1.10 percent through the Monetary Policy.
In recent years, loan recovery has been seen as a major challenge. Approximately 75,000 borrowers have been blacklisted by banks in the past three years, constituting 64% of the total borrowers blacklisted in the last three decades. NPL is expected to rise further if asset classification is done properly, however, Nepal Rastra Bank has tweaked the asset classification measures that will help banks to conceal non-performing loans. Moreover, revision in the regulatory retail portfolio will also support to minimise NPL and loan loss provisioning.
Nepal Rastra Bank has been criticised for keeping financial sector stability at risk and reversing the measures it had committed to with the International Monetary Fund (IMF)’s Extended Credit Facility (ECF) programme. With support from the IMF, Nepal Rastra Bank has implemented several reforms. These include issuing new Working Capital Guidelines, reclassifying assets, strengthening anti-money laundering and counter-terrorism financing (AML/CFT) measures, and enhancing the central bank’s autonomy and accountability. “The intention of the Monetary Policy is to conceal the reality by relaxing rules and regulations instead of resolving the issues of non-performing loans and fixing it with prudent regulatory and supervisory practices,” according to experts.
Challenges of Accommodative Monetary Policy During COVID-19
Nepal Rastra Bank has not learnt from the bitter experience of executing an accommodative Monetary Policy during the Covid regime in Fiscal Year 2020/21. In addition to restructuring and rescheduling loans, the central bank provided over Rs 150 billion in refinancing to borrowers to address vulnerabilities in the financial sector. A huge credit growth to the private sector was channelised to real estate sector and stock market which created the asset price bubble instead of supporting productive sector growth. A remarkable 27 percent loan growth was witnessed in that particular fiscal year, which was an exponential growth while comparing it to the average annual loan growth in the previous fiscal years. Due to the rapid expansion of private sector credit and the subsequent economic slowdown over two consecutive fiscal years, the central bank has been compelled to implement restrictive monetary policies to address the emerging challenges. The International Monetary Fund has said that the post-pandemic credit boom appears to have been preceded by broad-based regulatory easing within three broad categories – liquidity measures, capital requirements, and asset quality requirements – unlike the pre-pandemic credit cycles.
“NPL ratios increased in almost all sectors in the aftermath of the latest credit boom, domestically-oriented sectors saw the largest rises,” IMF mentioned in the fourth review of the Nepal Extended Credit Facility.
‘We can expect demand surge from execution of Monetary Policy’
Chandra Prasad Dhakal, President, Federation of Nepalese Chambers of Commerce and Industry (FNCCI)
The recently unveiled Monetary Policy is focused on raising demand. To some extent, this will address the challenges of the Nepali economy grappling with a slowdown due to demand shock.
The Monetary Policy is indicative and the announcement will be executed through issuance of directives and circulars gradually. The aim of expanding private sector credit to up to 12.5 percent is encouraging as credit expansion in the two previous consecutive fiscal years slowed to a crawl.
We welcome the move of minimising loan loss provision in pass loan, various facilities offered to the construction sector and productive sector mainly priority sector and MSMEs. The Monetary Policy has also addressed the challenges being faced by the real estate sector and stock market investors.
‘Monetary Policy lays effort on accelerating economy, productive sector ignored’
Confederation of Nepalese Industries (CNI)
The Monetary Policy has aimed to accelerate economic activities that have been adversely affected by the Covid-19 pandemic and shattered by the restrictive Monetary Policies issued by Nepal Rastra Bank previously, however, the productive sector is largely overlooked.
CNI welcomes the downward revision of the policy rates, which will support in minimising the cost of production and enhance competitiveness. The policy rate must be reflected in the bank rates. As far as the solvency of banks and financial institutions is concerned, the central bank should initiate measures to address the pressure on Tier 1 capital. However, the Monetary Policy has overlooked the need to hold the counter cyclical capital buffer until the situation has eased out, which is why it is difficult to transmit the credit expansion target of 12.5 percent to the private sector. Prior to unveiling the Monetary Policy, CNI had advised NRB to hold the 0.5 percent counter cyclical capital buffer, however, the central bank was not convinced with it. The announcement to study the efficacy of monetary transmission mechanism and bring competition in credit rates is a very timely move; the existing base rate provision should be scrapped.
Slump in overall demand has manifold impacts on trade, production sector and jobs. Likewise, the slowdown in construction sector has had a multiplier impact on the economy, which will remain for the longer term. CNI believes that the facilities provided to the construction sector will spur the construction sector. The production sector contracted by 2 percent in the fiscal year 2023/24 compared to the previous year. Timely intervention is crucial to prevent further economic deterioration. Minimising loan loss provisioning in pass loan to 1.10 percent is a positive move and this should not exceed 1 percent in coming years. The revision in regulatory retail portfolio will help to narrow down NPL and provisioning. Moreover, establishment of Asset Management Company is the need of the hour and the central bank will at least prepare the legal ground for it by drafting the Bill in this fiscal. CNI further recommends to scrap the working capital related provisions instead of enforcing it from next fiscal as announced by the Monetary Policy. CNI advises the central bank for a cautious revisit on the provision on bounced cheques and blacklisting including the suspension of bank accounts.
‘Monetary Policy has boosted the confidence of private sector‘
Confederation of Banks and Financial Institutions Nepal
The Monetary Policy 2024/25 is more balanced and relevent as per the expectation of banks and financial institutions, which will certainly boost the confidence of the private sector. Stimulating economic growth while maintaining financial sector stability is a complex challenge, particularly when faced with a decline in private sector confidence.
The recent Monetary Policy‘s announcements, including the review of the capital adequacy framework, reduced provisioning for pass loans, and the inclusion of certain regulatory reserves in Tier 2 capital, are positive developments. Additionally, the policy rate reduction, increased threshold for the regulatory retail portfolio, a special package for the construction sector, removal of the cap on institutional investor margin lending, support for startups and innovative sectors, a one-year deferral for credit adjustment variance analysis in working capital guidelines, and revised MSME loan ticket size thresholds are expected to contribute significantly to economic recovery.
Furthermore, the policy‘s focus on strengthening microfinance institutions (MFIs) and initiating the establishment of a second-tier regulatory body for savings and credit cooperatives, along with the drafting of an Asset Management Bill, will enhance overall financial sector stability and trust. Developing the infrastructure for a national payment switch will positively impact the economy. To effectively implement the Monetary Policy, Nepal Rastra Bank should address the challenges of excess liquidity and capital adequacy through directives, circulars and regular policy reviews in the coming quarters.
‘NRB has not deviated from the reform agenda and is taking it forward in a full spirit’
Nepal Rastra Bank recently unveiled its Monetary Policy for 2024/25, aimed at stimulating an economy that has been experiencing a slowdown for several years. In order to encourage banks and financial institutions (BFIs) to channel resources into the productive sector, Nepal Rastra Bank has eased certain provisions, enabling BFIs to extend credit and allowing borrowers to access up to approximately Rs 650 billion in the Fiscal Year 2024/25. As the economy navigates these turbulent times, Governor Maha Prasad Adhikari has introduced a cautiously accommodative monetary policy to support the government’s growth target of 6 percent. The policy includes various incentives for the construction sector and Micro, Small, and Medium Enterprises (MSMEs), among others. HRM Nepal sat down with Governor Adhikari to discuss how this Monetary Policy will be implemented to achieve the desired impact on the economy. Excerpts:
Q. You were appointed as Central Bank Governor during the challenging circumstances of the COVID-19 pandemic and navigated those challenges swiftly. Now, as you approach the final Monetary Policy of your tenure, how do you feel?
A. I have spent almost four-and-a-half years as the Governor of Nepal Rastra Bank. I had to work in an adverse situation. It was a quite delicate and precarious time for the world economy. I am fully satisfied with whatever I have been able to do with the support of my team and stakeholders. I have taken this opportunity to deliver the best from my end and everything is in front of the public. I want to leave it for public judgement.
Q. Nepal Rastra Bank recently unveiled the Monetary Policy for FY 2024/25. What are the major characteristics of this policy?
A. The Monetary Policy is cautiously accommodative and builds on the approach we have been gradually implementing over the past year and a half. Given the available space, we have introduced some flexibility. Currently, we have a solid foreign exchange reserve, the banking system is flush with liquidity, and we are seeing price stability and a drop in inflation. Against this backdrop, we have made a slight downward revision to the bank rate and policy rate. Additionally, recognising that Monetary Policy should be supported by macroprudential norms, we have projected private sector credit growth at 12.5 percent, or Rs 650 billion. To achieve this, we have cautiously provided some relaxation without compromising prudential norms, particularly for the construction industry, and allowed banks more leeway in capital allocation. In summary, this Monetary Policy is cautiously accommodative, aimed at channeling banking resources into the productive sector, providing support to the construction industry, and easing restrictions on the banking sector to facilitate the anticipated credit growth.
Q. Considering the pressure on capital adequacy ratio, especially Tier 1 capital, it seems the credit expansion target will be difficult to achieve. What is your take on it?
A. We have tried to address the pressure of capital adequacy ratio through various policy measures but that does not mean entire credit expansion will happen through these measures. Banks and financial institutions should bring other instruments as well. The Monetary Policy has provided a room for the BFIs to release that pressure. If everything goes as planned, credit expansion might meet the desired target.
Q. The government has been transferring the responsibilities to be carried out by the fiscal policy to the Monetary Policy. Do you think the Monetary Policy can address the challenges of the economy?
A. The challenge of budget execution is intensifying, with the effectiveness of spending units (cost centres) frequently called into question. On one hand, capital expenditure allocation is low; on the other hand, actual spending remains stagnant at two-thirds of the allocated budget. The economy is facing multiple challenges due to the inefficiency of capital expenditure, particularly in areas such as production, job creation, and the delivery of public goods and services. In this context, the Monetary Policy is increasingly being viewed as a tool to stimulate an economy weakened by insufficient public spending. However, this emerging narrative around Monetary Policy is flawed. Both fiscal policy and Monetary Policy must effectively play their roles to positively impact the economy. Monetary Policy cannot fill the gaps where fiscal policy needs to intervene; it merely creates an enabling environment for the private sector to utilise banking resources.
Q. During the COVID-19 period, Nepal Rastra Bank offered various relief measures to borrowers, including refinancing, restructuring, and rescheduling, which led to a significant increase in credit flow. How does Nepal Rastra Bank plan to prevent the recurrence of similar issues in the future?
A. I do not believe the same situation will recur. We granted some relaxation measures for revival and rehabilitation, and while some borrowers used them as intended, others became overburdened with debt. That period was part of a transitional phase during which we initiated reforms, such as the CD ratio adjustment, redirected resources to the productive sector, and released a draft of the Working Capital Guideline. With these reforms now fully implemented, the chances of certain sectors becoming overextended or credit being misused are slim. We are closely monitoring the situation to prevent any misuse of flexibility. We have developed a mechanism for regular impact assessment, so we are confident that we will achieve the outcomes envisioned in the Monetary Policy.
Q. Earlier, you suggested that banks had disregarded the instructions and moral suasion of the central bank. What exactly transpired between the central bank and the banks at that time?
A. The central bank regulates through policy. If licensed institutions fail to comply with policy execution, the central bank applies moral suasion or imposes penalties. However, I believe the BFIs have already recognised the importance of adhering to prudent norms and values and will not violate them.
Q. There are concerns that the Monetary Policy has reversed reform initiatives by adjusting loan loss provisioning, loan classification, the enforcement of working capital guidelines, and potentially compromising the accountability and autonomy of the central bank. Is this the case?
A. I have heard such concerns. However, we have not reversed any of the reform initiatives. Nepal Rastra Bank is fully committed to implementing all reform packages in both letter and spirit. When initiating reforms, gaps and behavioural complications can arise, which we must address to ensure the reforms are built on a solid foundation. If these aspects aren’t addressed, the reforms could falter. Rest assured, Nepal Rastra Bank remains steadfast in advancing the reform agenda with full commitment.
Q. During your tenure, the Monetary Policy shifted from accommodative to consistently contractionary, before reverting to accommodative measures at its conclusion. Could it be argued that the stringent policies enforced over two consecutive fiscal years during this period aimed to discipline banks and borrowers who had contravened central bank regulations?
A. The policy decisions were primarily influenced by prevailing economic conditions. Initially, during the COVID-19 pandemic, global trends favored accommodative and unconventional monetary policies. Our primary focus then was safeguarding the institution and protecting customers. Both the central bank and financial institutions played a crucial role in this regard. Subsequently, we confronted significant challenges in external sector stability due to a substantial depletion of foreign currency reserves. This necessitated the implementation of stringent measures by the central bank. The enforcement of these measures created some fiscal space, which allowed for subsequent relaxation.
Q. The Monetary Policy has outlined plans to draft an Asset Management Bill to establish an Asset Management Company in response to the increasing level of non-performing loans. Is it assumed that strict supervision of credit utilisation could potentially lead to a rise in NPLs?
A. Upon implementing the credit loss model (NFRS-9), we anticipated a potential decline in provisioning levels, prompting the establishment of a five-year backstopping mechanism. This indicates a high degree of prudentism or conservatism in our approach. International audit firms conducting audits of local banks have not expressed concerns about a significant rise in NPLs, mitigating such risks. Regarding the Asset Management Company, we aim to create a legislative framework by drafting a Bill as announced in the Monetary Policy.
Q. While the central bank does not directly oversee cooperatives, their failures have had a detrimental impact on the financial system. As an advisor to the Government of Nepal, what recommendations would you offer to address this issue?
A. Nepal Rastra Bank has provided feedback to relevant agencies regarding the interconnectedness of cooperatives, which extends beyond depositors and directors. Cooperative failures are partially linked to broader economic challenges. As an advisor to the Government of Nepal, we advocate for a comprehensive overhaul of the cooperative sector. This necessitates the establishment of a dedicated regulatory agency to prevent the misconception of self-regulation among cooperatives. Given their similarity to financial institutions in terms of services offered, cooperatives should not operate without oversight. Urgent action is required to establish a second-tier regulatory institution responsible for issuing regulations, monitoring and overseeing all cooperatives in Nepal, in accordance with constitutional provisions. It is essential to recognise that cooperatives’ financial activities, including deposits and loans, are reflected in their balance sheets, providing a basis for analysis and addressing current challenges.
Q. While you have emphasised the support provided to the construction sector and MSMEs, a significant portion of MSMEs remain ineligible for financing from financial institutions. As an advisor to the government, what strategies would you recommend to address this issue and enhance the creditworthiness of approximately 49% of MSMEs currently excluded from financial institution financing?
A. We have addressed the construction sector’s impact on the economy and implemented measures through Nepal Rastra Bank to facilitate financing from financial institutions. Additionally, a 15 percent credit allocation target for SMEs has been set for the Fiscal Year 2026/27. To support small-ticket MSMEs, interest rates have been capped at the base rate plus 2 percent premium. We anticipate this facility will foster MSME growth, gradually increasing their capacity to access credit from financial institutions. Furthermore, other government agencies can provide support to enhance their credit eligibility.
Q. The target of 5 percent inflation seems quite ambitious. How does the central aim to tame the inflation at the desired level?
A. Achieving an inflation rate of 5 percent or below in Nepal is a challenging task. Over the past 30 years, the average inflation rate has been around 7 percent. Controlling inflation is not solely within the purview of Nepal Rastra Bank. While the central bank can influence demand-side factors and money supply, other variables such as supply-side constraints and imported inflation can hinder efforts to curb inflation. Nevertheless, the inflation target was established considering the current economic landscape, including India’s aim to control inflation at 4 percent and the anticipated stabilisation of oil prices. Given Nepal’s stagnant aggregate demand, this target is ambitious.
Q. There is scepticism regarding the accuracy and fairness of Nepal Rastra Bank’s price and inflation data. What do you have to say on this?
A. The price data is collected independently from various market centers, making it a reliable indicator. This function operates independently within Nepal Rastra Bank. We are in the process of establishing a new baseline for measuring inflation. It is understandable that individuals may have differing perceptions due to variations in consumption patterns. Nepal Rastra Bank does not manipulate price data, as such actions would undermine the credibility of decisions based on this information.
Q. Nepal Rastra Bank has implemented several prudent regulations and supervisory measures, including working capital guidelines, loan classification, enhanced asset-liability management, and digitalisation initiatives. How soon can we expect the launch of a Central Bank Digital Currency (CBDC)?
A. CBDC is a top priority, and we are developing it in phases. We have completed the conceptual study, established a dedicated division, and partnered with various platforms of the Bank for International Settlements (BIS). Next, we will engage with stakeholders to develop a wholesale CBDC configuration. Subsequently, we will finalise the system design, select the configuration, conduct testing and collaborate with the public in a trial phase to gather feedback for improvement. We aim to launch a CBDC pilot by 2026.
Q. You will be completing your tenure as central bank governor in the next few months. What are your plans for the future?
A. I have not yet thought about any plan. I will be working independently in areas where I can contribute through my expertise.
Q. Are there any chances to see you as the central bank governor again?
A. I do not want to continue after completing my tenure. It is not appropriate. I think we have to pave the way for a new leadership and let them work with new thoughts and aspirations. I believe that those who have already led the institution should not repeat and kill the opportunity of others to be in that position.
