1st Quarter Review of Monetary Policy – NRB’s Course Correction to Kick-start Economy

After two years of monetary tightening, the central bank has backtracked from its previous stance with the monetary policy review.

the HRM

A day before the first quarterly review of the Monetary Policy for 2023/24, Finance Minister Dr. Prakash Sharan Mahat convened a meeting with the board of directors of Nepal Rastra Bank (NRB). He stressed the need for a lenient approach toward loan restructuring and rescheduling, and flexibility in real estate and margin loans in order to stimulate the economy. The persuasion of the finance minister was anticipated, given the significant pressure faced by the political leadership, particularly from the private sector.

On December 8, issuing the first quarterly review report of the Monetary Policy for FY 2023/24, NRB backed down from its previous stance which it has held for the last two years. This move is a clear indication of the central bank’s intention to reduce interest rates and ease the hardships of the business community.
Governor Maha Prasad Adhikari and the NRB’s top brass have faced sharp criticism for tighter monetary policy which the business community members and economists say has affected the economic activities and demand for goods and services in the market. The private sector has squarely pointed fingers at the central bank, holding it responsible for the economic slowdown.

In the review of the monetary policy, NRB lowered the central bank policy rate and bank rate by 1 percent and 0.5 percent respectively. The bank rate has been reduced to 7 percent from 7.5 percent earlier while the policy rate has been lowered to 5.5 percent from 6.5 percent.
Currently, the Nepali banking system has excess liquidity of approximately Rs 551 billion. Consequently, the interbank interest rate of banks and financial institutions has dropped to below 1 percent. In response to this situation, NRB has taken measures to regulate it by reducing the deposit collection bid rate by approximately 1.5 percentage points, bringing it down to 3 percent.

With a balance of payments in surplus, a 30 percent surge in remittance inflow, and robust forex reserves, the central bank seems to have changed its course to put the derailed economic engine back on track. Given the favorable external sector indicators, NRB has lowered key interest rates to support economic growth as well as achieve credit growth targets.

With the reduction in the policy rate, banks and financial institutions (BFIs) can now decrease their interest rates. With a 1 percentage point reduction in the policy rate, it is anticipated that the base rate of banks will also experience a corresponding decrease of 1 percentage point. Banks are currently gearing up to announce their interest rates for the month of Poush, with the current average base rate standing at around 9.94 percent. The decrease in base rates translates to more affordable loans for borrowers, thereby increasing demand for credit in the market.

The central bank has also attempted to address the grievances of the real estate sector and the stock market. These asset classes have been badly affected by the strict monetary arrangements for the past two years. The central bank has lowered the risk weightage of real estate loans and margin-type loans. The risk weightage for real estate loans and share mortgage loans exceeding Rs 5 million has been reduced to 125 percent. Additionally, the central bank has raised the monthly installment income ratio for home loans up to Rs 5 million from 50 percent to 60 percent.

“The new arrangements will reduce the pressure on the capital fund ratio for banks and an additional amount equal to Rs 40-50 billion will be available for investments in loans in various sectors,” said Governor Adhikari.

As a significant amount of funds of investors is currently tied up in the real estate and stock market, the key private sector bodies have repeatedly demanded flexibility from the central bank. This demand received support from Finance Minister Mahat as he asked the NRB directors to ease the situation for the investors. “While the property prices should not fluctuate too much, we concluded that given the difficulties faced by the investors, the investments currently immobilized in the real estate and stock market need to be activated,” said an NRB official.

In response to borrowers experiencing financial distress, NRB has granted them some relief. Recognizing the growing demand for loan restructuring, the central bank has said that it would assist borrowers genuinely facing financial challenges through mechanisms like loan restructuring and rescheduling. BFIs have been mandated to complete loan restructuring by the end of April, with the requirement of collecting 10 percent of the outstanding interest.

Governor Adhikari clarified that this flexibility is specifically intended for borrowers genuinely encountering financial difficulties. According to him, the NRB’s objective is to implement more effective measures against borrowers intentionally defaulting on bank loans.

Moreover, the central bank has also shown its willingness to assist microfinance borrowers who, despite maintaining regular communication, find it challenging to regularize their loans due to extenuating circumstances. According to NRB, arrangements will be in place to restructure the loans for such borrowers, provided that they submit applications for loan restructuring to the institution by April 2024.

Given the economic slowdown and challenges in cash flow impacting the recovery of loans, bankers assert that the loan restructuring and rescheduling facility will offer relief to borrowers. According to a banker, providing borrowers with a year or two can enable businesses to recover and return to normalcy. “Merely auctioning the mortgage, even if the loan is in trouble, does not solve the underlying issue,” the banker said. “In circumstances where granting additional time would be more advantageous, why we should not consider the alternative? But this doesn’t imply extending the time for those who intentionally refuse to make payments.”

Governor Adhikari stated that NRB has implemented a policy aimed at easing the process of loan expansion and facilitating the continuity of business for responsible borrowers. He reiterated the NRB’s commitment to maintaining the interest rate corridor and policy rate considering the inflation rate.

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