A head of the upcoming fiscal year, stakeholders are advocating for an expansionary monetary policy. This policy would bolster private sector confidence, facilitate credit access, and stimulate job creation that aligns with government budget execution, ultimately accelerating economic growth.
During the interaction organised by the Management Association of Nepal (MAN) — umbrella network of management professionals in the country — on Monetary Policy, 2024/25 as part of its flagship annual event on June 24, private sector associations have presented striking feedback in the presence of Nepal Rastra Bank Governor, Maha Prasad Adhikari.
The programme kicked off with a welcome speech by MAN President, Mohan Raj Ojha. He welcomed the participants and remarked that the discussion will be able to draw valuable feedback for Monetary Policy 2024/25, which is expected to be instrumental in averting the current economic crisis in the country.
Delivering his introductory remarks, Ashok Sherchan, CEO of Prabhu Bank and Executive Member of MAN, underlined the need for monetary easing in a rational way. Since the last few years, the Nepali business fraternity has started relying on the monetary policy rather than the fiscal policy, according to Sherchan. “In this regard, the monetary policy needs to utilise instruments to avert a crisis, embrace entrepreneurship and provide a ray of hope to the people,” he added.
Sherchan highlighted that the central bank’s cohesive and careful policies were instrumental in saving the economy from a deeper crisis. He further said that the Nepali economy is growing; the GDP size is more than Rs 5.7 trillion, which is sizable. Emphasising the need for policy and political stability as two critical factors to move forward, Sherchan presented some indicators such as remittance inflow, forex reserve, loan mobilisation and resilience of the financial sector, among others, which demonstrate that the economy is moving towards a positive direction.
“In the last 10 months, Nepal has received remittance worth Rs 1,200 billion. Inflow of remittance is high and the forex reserve is in an exciting position. All these indicators signal that the productive utilisation of resources is the need of the hour,” he stated.
Acknowledging the recent economic strain, he expressed optimism for the future, stating, “There have been periods of significant economic stress, but there are now rays of hope on the horizon.” He emphasised the need for continued activity, using the analogy: “As the saying goes, ‘If we can’t run, we walk. If we can’t walk, we crawl.’ The same applies to business.” However, he also highlighted concerns on the fiscal side, noting that only 65% of the revenue target has been achieved.
Citing that the country has to spend more on debt servicing rather than capital expenditure, Sherchan stressed that policy makers and all actors of the economy should be alert, cautious and efficient so that the challenges can be managed.
Various associations representing the private sector such as Confederation of Bank and Financial Institutions Nepal, Nepal Bankers’ Association, Life Insurers’ Association, Independent Power Producers’ Association – Nepal (IPPAN), Non-Resident Nepali Association, Hotel Association Nepal, Nepal Land & Housing Developers’ Association, Pharmaceuticals Association Nepal and various other sectoral associations participated and provided feedback/suggestions for Monetary Policy 2024/25.
Bhesh Raj Lohani, president of the Nepal Land & Housing Developers’ Association, called for a significant boost to the real estate sector. He proposed raising the loan-to-value (LTV) ratio to 80%, making it easier for potential homeowners to secure financing. He argued that this change would have a ripple effect throughout the economy. Construction is a labour-intensive industry, and increased activity would create jobs and stimulate related sectors. He emphasised the need for a streamlined real estate transaction process.
Lohani proposed the creation of a formal property exchange to connect buyers and sellers efficiently. This system would also ensure proper licensing of brokers and maximise tax collection for the government.
He further highlighted a troubling discrepancy. He estimated that annual real estate transactions total around 700,000 units, with a value of Rs 1.2 trillion. However, only Rs 800 billion is officially recorded, suggesting significant under-the-table dealings.
Finally, Lohani advocated for more flexible loan options. He suggested allowing loan rescheduling and restructuring to aid borrowers facing financial difficulties. Additionally, he proposed maintaining a 100% risk weight for real estate loans, ensuring that banks carefully assess the associated risks. By implementing these changes, Lohani believes the real estate sector can become a powerful engine for Nepal’s economic growth.
The government has announced a goal of generating 20,000 MW of electricity. However, Ganesh Karki, President of the Independent Power Producers Association – Nepal, emphasised the significant resources required by the country’s power producers to achieve this target.
Karki underscored the significant investment needed to fulfil the government’s agreements to export 10,000 MW of electricity to India and Bangladesh. He estimated that Rs 6.1 trillion needs to be invested in the energy sector by 2035 to meet this ambitious goal. To bridge this funding gap, Karki proposed a bold solution. He urged Nepal Rastra Bank to direct banks and financial institutions (BFIs) to substantially increase lending to the energy sector. This could involve allocating up to 20% of their total loan portfolios to support energy projects.
Santosh Koirala, Vice President of Nepal Bankers’ Association, raised concerns about pressure on commercial banks’ tier 1 capital (core capital). He urged regulators to postpone a 0.5% increase in the countercyclical buffer requirement until mid-July 2024. “Even with ample liquidity, some banks struggle to lend due to limited tier 1 capital,” Koirala explained. “We are advocating for a relaxation of loan loss provisioning requirements, following the recent reduction from 1.3% to 1.2%.” In addition to this he suggested to expand the SMEs loan ticket size under the priority sector.
Poshak Raj Paudel, President of the Jeeban Beema Sangh (Life Insurers Association), called for a level playing field. He argued that life insurance companies are crucial in channeling funds from the informal to the formal sector, and therefore deserve interest rates on deposits that are competitive with individual depositors. Additionally, he urged collaboration with bank networks to expand insurance penetration into rural areas, bringing financial security to a wider segment of the population.
Chanky Kshetry, President of Nepal Insurers’ Association, highlighted a concerning trend. The non-life insurance industry is experiencing a slump due to a lack of business activity. Kshetry pointed to the critical role of loan growth in the private sector, arguing that slow credit expansion from banks and financial institutions (BFIs) is causing a decline in loan security products offered by non-life insurers. He emphasised that a healthy loan environment is essential to stimulate overall economic growth.
The Federation of Nepal Gold and Silver Dealers’ Association (FeNeGoSiDA) pushed for an increase in the daily gold import quota to 20 kg. They argued that the current quota is insufficient to meet the rising demand for gold. “With the recent budget increase in gold import tariffs, the quota system for commercial banks should be abolished,” said Manik Ratna Shakya, Immediate Past President of FeNeGoSiDA. “Furthermore, restrictions on silver imports should also be lifted,” he added.
Meanwhile, Binayak Shah, President of Hotel Association Nepal, reported a significant recovery in the hospitality sector, with activity nearing pre-pandemic levels. However, he highlighted challenges due to an oversupply of rooms. “Star hotels are facing fierce competition due to three times more supply than demand,” Shah explained. “To address this, we urge authorities not to raise loan interest rates for the tourism sector (classified as a priority sector) by more than 1% during the loan repayment period,” he said.
Recognising the influx of Indian tourists, Shah also advocated for more effective digital payment options. Additionally, he called for an increase in the cash allowance for Indian tourists coming to Nepal, suggesting a limit exceeding INR 25,000. “International tourists can’t exchange more than USD 300 per day, that must be raised to encourage spending as well as attract high-yield tourists,” he said, adding, “Nepali banks provide services to tourists at 3% (fees); while using credit cards fees are very high, that must be addressed by the upcoming monetary policy.”
DK Dhungana, President of the Private and Boarding Schools’ Organisation Nepal (PABSON), highlighted the significant capital (around Rs 200 billion) lost due to students pursuing education abroad. He proposed establishing colleges and academic institutions affiliated with international universities as a solution. “This would discourage students from leaving the country for studies,” Dhungana argued.
Furthermore, he emphasised the importance of the education sector in developing human capital. He urged for the inclusion of education institutions under the priority sector lending category, with adjusted interest rates reflecting the sector’s long-term contributions.
The Federation of Contractors’ Associations of Nepal (FCAN) expressed concern about outstanding government payments owed to construction companies. Er. Ang Dorji Lama, Senior Vice President of FCAN, stated that the sector is facing significant financial strain. “We have over Rs 60 billion in outstanding dues from regular government contracts alone,” Lama explained. “Additionally, contracts worth Rs 500 billion risk becoming chronic if not settled within the next six months,” he added.
Lama emphasised the ripple effects of a slowed-down construction sector on related industries, material suppliers, and employment generation. He urged Nepal Rastra Bank (NRB) to implement a mandatory credit rating system for projects exceeding Rs 150 crores (the current threshold is Rs 50 crores). This would help mitigate financial risks and potentially expedite project completion.
Lama also raised concerns regarding joint ventures (JVs) in the construction industry. He highlighted a significant issue: a high number of lawsuits (40% according to him) related to bounced cheques involve JVs. “If the entire JV is held responsible for a bounced cheque, it could disqualify many construction companies from bidding on projects while legal disputes are ongoing,” Lama explained. “This creates unnecessary delays and hinders project completion.”
He proposed a solution for the upcoming monetary policy: “The policy should focus on holding the signatory company, not the entire JV, accountable for bounced cheques. This will ensure smoother project execution while maintaining financial accountability.”
Dinesh Thakali, Treasurer of Development Bankers Association Nepal, commented on the recent third-quarter review of the country’s 2023-24 monetary policy. He said the review offered insights into capital adequacy for banks. To address capital needs, Thakali suggested allowing banks to issue debentures. He additionally highlighted repayment issues faced in directed lending and subsidised credit programmes. He urged Nepal Rastra Bank, the regulatory body, to work with the government to facilitate timely reimbursement of accrued amounts under the subsidised credit scheme.
During the interaction, Prahlad Dahal, President of the Nepal Dairy Association, highlighted that dairy firms have substantial stock but are unable to settle farmers’ dues. He emphasised that dairies should be allowed to secure loans against their stock collateral to facilitate payments to farmers. Additionally, he urged the central bank to revise upward the loan limits based on dairy companies’ turnover, ensuring consistency and supporting firms’ planning and cash flow. Dahal also sought remedies for the abrupt decision by banks and financial institutions (BFIs) to reclassify credit to dairies from subsidised loan category to normal category.
Badri KC, President of the Non-Resident Nepali Association (International Coordination Council), recommended incentivising remittances, similar to practices in Pakistan and Bangladesh, to discourage informal channels. Furthermore, he advised expediting the Double Taxation Avoidance Agreement (DTAA) with potential investment source countries to attract investment from the Nepali diaspora.
During the programme, KD Joshi, an agriculture expert, emphasised that climate constraints significantly impact agriculture and necessitate government intervention. He recommended scrutinising agricultural loans to prevent widespread misuse and ensuring easy access to loans for fruit and livestock farming in hilly districts. This approach aims to retain people in the hills by promoting income-generating activities.
Furthermore, Joshi expressed the importance of providing production loans specifically for crops (including seeds, varieties, and breeds). He highlighted that research and development (R&D) should be encouraged, as it forms the core of agriculture sector development.
Bharat Upadhyay, Former Director General of the Department of Agriculture, proposed that the monetary policy should consider envisioning a 10-year period starting from 2024/25 as the base year. This recommendation aligns with the fiscal budget’s announcement of an ‘agriculture investment decade’ aimed at transforming Nepal’s agriculture sector. Upadhyay emphasised the need for Nepal to develop its own supply chain, fostering self-reliance in agricultural production.
During the same interaction, Ramani Gaire from the Furniture and Furnishing Association highlighted the impact of the COVID-19 pandemic on exports. Receivers experienced delays in obtaining consignments beyond the initial expectations. However, banks are currently withholding the security guarantee amount (10% of the total value). Gaire suggested that if intervention from Nepal Rastra Bank is necessary to release these funds, banks should be instructed accordingly.
Furthermore, Roshan Koirala, Executive Director of the Confederation of Banks and Financial Institutions Nepal, expressed concerns about the sharp decline in distributable profits for banks, which have entered negative territory in recent years. He noted that several banks are under pressure to meet Tier 1 capital requirements. Given this situation, Koirala recommended that Nepal Rastra Bank (NRB) consider implementing a 0.5% increment in the counter-cyclical buffer.
Arun Sigdel, a chartered accountant, shared a similar perspective. He believes that adding a 0.5% counter-cyclical buffer would significantly impact financial institutions (BFIs). Sigdel points out that India has already withdrawn this buffer, and he suggested that Nepal Rastra Bank should maintain flexibility, especially when the situation is favourable.
Sigdel also opposed the provision requiring a minimum six-month period for revising Working Capital Guidelines. He argued that some businesses operate on shorter cycles and need immediate attention. Additionally, Sigdel drew attention to Anti Money Laundering (AML) provisions related to international trade. He finds the AML circular impractical, particularly the requirement for banks to track under and over invoicing. According to Sigdel, such tracking is unfeasible for banks.
Ram Bahadur Yadav, President of the Microfinancing Association Nepal, has urged the central bank to replace the interest rate cap with a scientifically determined base rate or spread rate for microfinance institutions. While these institutions currently rely on resources from commercial banks, development banks, and finance companies for lending to underserved sectors, Yadav emphasised that MFIs should also be allowed to collect small deposits. This diversification of funding sources becomes crucial, especially considering that deposits up to Rs 5 lakhs are covered by insurance.
Furthermore, Yadav recommended providing loan restructuring facilities for clients over a few years, based on borrowers’ repayment capacity.
Similarly, Niranjan Phuyal, Senior Officer at NEPSE (Nepal Stock Exchange), suggested allowing broker companies to lend to stock market clients. Additionally, Phuyal proposed operationalising NRNs (Non-Resident Nepalis) accounts, enabling them to invest in the stock market.
Rudra Prasad Neupane, President of the Footwear Manufacturer’s Association of Nepal, advocated for maintaining a 0.5% addition in the base rate as an effective interest rate. He believes this approach will promote the productive sector, emphasising that competitiveness within this sector relies on managing the cost of funds effectively.
Also, Kiran Kumar Shrestha, Former President of MAN and Former CEO of Rastriya Banijya Bank, encouraged Nepal Rastra Bank to think unconventionally and explore innovative monetary policy solutions to address the ongoing crisis. Shrestha believes that such creative approaches will empower stakeholders to seize opportunities.
During his address, Anjan Shrestha, Senior Vice President of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), highlighted several key points. Firstly, he emphasised that Nepal Rastra Bank should allow the market to operate according to its own rules, citing the provisions of the Working Capital Guideline. Shrestha advocated for a shift away from excessive policing and suggested that prudent regulations could drive the economy more effectively.
Secondly, Shrestha proposed that banks be granted the authority to make decisions regarding loan restructuring and rescheduling, taking into account borrowers’ specific situations. This approach, he argued, would create avenues for businesses to thrive and enhance overall recovery.
Thirdly, he urged banks to exercise discretion in interest capitalisation. By allowing banks this flexibility, they can better respond to market dynamics and borrower needs. Additionally, Shrestha addressed the expansion of non-commercial assets within financial institutions (BFIs). He recommended the establishment of an asset management company to facilitate this expansion. Furthermore, he stressed the importance of simplified Know Your Customer (KYC) rules and proposed different interest rates for the manufacturing and trade sectors. Lastly, Shrestha called for a reduction in the risk weightage associated with letter of credit (L/C) facilities for bonded warehouses.
During the interaction, Kamalesh Kumar Agrawal, President of Nepal Chamber of Commerce, expressed deep concern over the negative growth of the industrial cluster. He highlighted the private sector’s struggle with capital erosion, emphasising that regular debt servicing has become an uphill battle. Agrawal presented compelling evidence: out of all the blacklisted borrowers over the past three decades, a staggering 64% (equivalent to 75,000 individuals) have been blacklisted in just the last three years. He firmly asserted that without more flexible policies, the private sector cannot bear additional risks.
Meanwhile, Maha Prasad Adhikari, Governor of Nepal Rastra Bank, emphasised the importance of listening to feedback from the complete economic ecosystem. He stated that Nepal Rastra Bank prioritises gathering input before unveiling monetary policies.
Adhikari acknowledged that the central bank has maintained a tight monetary stance for the past year and a half, but policies are gradually becoming more accommodative. Addressing the challenging economic situation, he explained that consumption is declining due to migration, construction activity is significantly reduced, and even labour-intensive sectors face backward linkages.
NRB Governor Adhikari stressed that while the private sector has grown substantially over the years, adaptation remains crucial. He called for strategic thinking within the business community, emphasising that policymakers should create an enabling environment and a level playing field. Lastly, he commended the resilience and stability of the banking sector, recognising their critical role in serving the economy over the long term.
