New Monetary Policy: A Brief Overview


Uttam Maharjan


Nepal Rastra Bank has announced a new monetary policy for the fiscal year 2073/74 BS. A monetary policy is announced every year after the announcement of the budget in order to fulfill the provisions relating to the financial sector as stipulated in the budget. The budget for the fiscal year 2073/74 came out well ahead in time, whereas the monetary policy was out towards the end of the fiscal year 2072/73.

The main objectives of the monetary policy are to attain 6.5 per cent economic growth, limit inflation to 7.5 per cent and keep broad money growth at 17 per cent to curb demand-driven inflation. Its other objectives are to increase domestic credit by 25 per cent and increase credit to the private sector to 20 per cent. The monetary policy also aims at maintaining stability in the foreign sector, boosting the productive sector by directing more and more loans to this sector, increasing financial access and promoting financial literacy.



Attaining 6.5 per cent economic growth is a challenge. The adverse effects of the Madhes agitation and the Indian blockade are still hounding the economy. However, with reconstruction and rehabilitation works showing signs of picking up momentum, there may be a flurry of economic activities in the near future. This may help in the attainment of the targeted economic growth.

On the other hand, containing inflation to 7.5 per cent is not an easy proposition. Inflation now hovers around 11 per cent. The rampant black-marketing activities during the Indian blockade have pushed up inflation. Although black marketing has come to a halt to a great extent, the prices hiked indiscriminately at the time have not come down. Therefore, curbing inflation is a great challenge.

The monetary policy has not revised the cash reserve ratio (CRR) and statutory liquidity ratio (SLR), although there is excess liquidity in the market. Perhaps, NRB intends that the excess liquidity be mobilised in the productive sector (agriculture, hydropower, tourism, cottage and small-scale industries). In fact, the monetary policy has accentuated lending in the productive sector. That is why, the monetary policy has made it compulsory for banks and financial institutions to devote 15 per cent of their total loan portfolio to the agricultural and energy sectors by the mid-July of 2017. The percentage is 12 now.

The monetary policy has tried to curb margin lending. Now, margin lending has been limited to 50 per cent of the average share value calculated on the basis of 180 days’ share values or the current stock price, whichever is lower. Before this, it was limited to 60 per cent or the stock price, whichever was lower. Such provision has been made to rein in the unnaturally rising bullish trend in the market vis-à-vis the economy, which is in the doldrums.

People tend to invest in shares blindly, i.e., by not studying the company they are going to invest in. When share prices crash drastically, the loans disbursed against the shares may pose a risk. To avoid such potential risks, margin lending has to be curtailed. It is also designed to persuade banks and financial institutions whose loan portfolio consists of huge loans against shares to curtail margin lending.

Similarly, the monetary policy has reduced the limit of real estate lending. In the past, the limit of the loan was 60 per cent of the value of collateral. Now, the limit has been reduced to 50 per cent. This measure has been taken to control the real estate lending of banks. The real estate business has gradually picked up after lying fallow for the last five or six years.    

Although the percentage of deprived-sector lending has not been changed, the monetary policy has changed the pattern of lending. As per the new provision, banks are required to directly invest at least two per cent of their total loan portfolio in the deprived sector and the remaining three per cent of the loans may be made through microfinance institutions. Till now, banks had been providing five per cent of their total loans to microfinance institutions, micro-hydropower companies, cooperatives and other institutions that, in turn, made loans in the deprived sector.

Banks will find it heavy going to make direct investments in the deprived sector as they will have to go to the rural areas (deprived groups are mostly concentrated there) and take the initiative of finding out underprivileged groups who need the loans to improve their life. Since two per cent of the total loans will be made directly by the banks, the loans of microfinance companies engaged in deprived-sector lending will be affected, resulting in lower profit. 

Besides, banks will have to unwillingly step into the jurisdiction of microfinance institutions, which have come into existence for the purpose of uplifting the deprived communities through privileged lending. Further, banks will have to divert at least two per cent of their total loans from microfinance companies to underprivileged groups, which is not an easy proposition given their infrastructure, branch networks and manpower. 

Direct lending in the deprived sector is not feasible for banks as they will have to directly approach the groups requiring such loans. As microfinance institutions have been dealing with such individuals or groups for years, it will take time for the banks to develop rapport and relations with such groups. Further, banks will have to mobilise additional manpower or extend branch networks for this very purpose.

The main thrust of this provision may be to give a shot-in-the-arm to competition among the banks and force microfinance companies to curtail interest rates, but the provision has turned out to be a hard nut to crack for the banks.

On the other hand, the new provision for counting up to Rs. one million invested in projects designed to boost commercial agriculture in deprived-sector lending is desirable for banks as it will help them to attain the 5 per cent target of deprived-sector lending. 

The monetary policy has increased the limit of consortium lending. From now onwards, a single bank can lend up to Rs. one billion to a project/business undertaking against the limit of Rs. 500 million in the past. Making a huge loan to a single borrower is fraught with risks. This has increased lending risks for banks.

The monetary policy has also set the spread rate for microfinance companies at seven per cent on the basis of their cost of fund. This provision may affect their very survival as they will have to curtail the rates of interest on lending. Further, the paid-up capital of microfinance development banks, i.e., those engaged in wholesale lending, will have to be increased to Rs. 600 million from the current 100 million by mid-July of 2018.

The monetary policy has made it compulsory for banks to invest at least three per cent of their total staff expense on training and career development. The objective of this provision is to produce skilled human resources. It is a good provision. But what should be kept in mind is that spending money on training and career development just for the sake of training and career development will not churn out the desired results. So attention should be paid by the banks to ensure that their money is not squandered on unproductive training and other activities.

The monetary policy has also made provision for banks to devote one per cent of their profit to corporate social responsibility (CSR) activities. In fact, banks have been involved in CSR activities for long. They have been associated with such sectors as sports, healthcare and education. They have also been helping helpless senior citizens, orphans, differently-abled people and other underprivileged people. The new provision has instilled in them an even more acute sense of CSR that is expected to further contribute to society.


Interest rate corridor

The monetary policy has introduced the interest rate corridor for the first time in Nepal. This provision is beneficial to both depositors and loan clients. The interest rate corridor is a mechanism that guides short-term market rates and helps keep all interest rates in a certain band, thus curbing volatility of interest rates. With the introduction of this mechanism, depositors will not have to grouse about low interest, while loan clients will not have to worry about high interest.

Overall, the monetary policy is expected to bring about stability in the financial sector by introducing some reformatory measures. Let’s hope that the monetary policy will pan out in its objectives. For this, cooperation from all the concerned sectors is forthcoming.

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