It is obvious
for the stakeholders to have an interest in the to-be introduced the monetary
policy. Besides the rumors about
"Big Mergers" and "Forced Merger" increased curiosity
regarding the policy. Amidst all the rumors and curiosity, the much-awaited
Monetary Policy of 2019/20 was released on July 22, 2019.
Recently presented Monetary
policy aims to capitalize on the achievement to date and also aims to address
the emerging concerns prevalent in the contemporary banking and financial
sector of the country.
In contrast to widely popular
belief that monetary policy would proactively propagate the notion of forced
merger/acquisition, the central bank has proposed an amicable offer to promote
the merger and acquisition of the banks and financial institutions(BFIs).
Generally, the monetary policy
aims to achieve three major objectives: control inflation, maintain fiscal
stability, and assist the growth target of the government envisioned by the
fiscal policy. In this connection, the monetary policy 2019/20 aims to move in
the same direction. It has adopted a balanced approach and seems promising. The
analysis has been presented under the following four headings.
1. Interest Rate Stability
The appropriate rate of Interest
has always been a topic of discussion and debate. The suppliers of funds expect
to get an adequate return on their hard-earned money. Whereas the users of the
funds like industrialists and businessmen always claim the interest rate to be
exorbitant. Though the determination of interest rate is not within the sole
control of the Central bank, it can devise policy measures to ensure the
stability of the interest rate. The Central bank seems to be moving towards the
attainment of the interest rate stability.
For eg, the data of the last three year shows such direction.
Interest
rate(Weighted Average)
|
2073 Ashad
|
2074 Ashad
|
2075 Ashad
|
Deposit
|
3.3
|
6.20
|
6.50
|
Loan
|
8.9
|
11.30
|
12.50
|
Average Base Rate
|
6.50
|
9.90
|
10.47
|
Ability to stabilize the rate of
interest will benefit both the depositors and the borrowers. Similarly
decreasing the spread rate to 4.4%(from the existing rate of 4.5%) in accordance with
Financial Sector Development Strategy, decreasing the Lender of Last Resort(LOLR)
rate to 6% from the existing 6.5%, etc indicate the measures by the central
bank to ensure that the interest rate will remain within the acceptable limit.
Likewise raising 25% of the bank's paid-up capital as debentures will enhance
the capacity of the BFIs to invest for a longer period while ensuring the
stability of the interest rate. The
policy has also made a downward revision of the refinance rate and has barred
the BFIs to charge more than 2% to the base rate for the SME loans, it has also
allowed the BFIs to accept Deposits from foreign corporate and Non-Resident
Nepalese for a minimum period of two years. With the above-mentioned measures,
the central bank has made ample effort to ensure stability of the interest rate
while also expanding the banking instruments.
2. Financial
Consolidation
The policy has encouraged willful
mergers and acquisitions of BFIs. For a bank entering into merger/acquisition, various facilities have been offered such as; extended time limit up to 2078
Ashad to meet sectoral lending in agriculture, energy, and tourism sector and
to maintain spread rate of 4.4%, such banks do not have to take permission from
Nepal Rastra Bank to open branches, and waiver of cooling period provision for
the Chief Executive Officer and the Board of Directors. Similarly, it has also
announced privilege for the Microfinance financial institutions entering into
merger/acquisition. Similarly, the policy also puts light on the need for
merger/acquisition of institutions with cross-holdings, regulation, and
supervisions of Systematically Important Banks (SIBs), etc. All these measures
will strengthen the capacity of BFIs to absorb risk, enhance lending capacity,
cut duplicating costs, etc.
3.
Financial Inclusion and Consumer Protection
The policy is step-forward to
escalate the level of financial inclusion in the country. In line with the
objective of ensuring broader financial inclusion, the policy has aimed towards
establishing banking channels to all 6743 ward of 753 local levels. BFIs now
can open Branches less banking agents without the approval of the central bank.
This initiative is more likely to bring a huge volume of unbanked/underbanked
population within the banking network.
Similarly, BFIs now need to
develop an audio notice board to transmit the information about their service
offerings to the public without transferring any cost to the customers. They
also need to develop their website in Nepalese languages. Most importantly the
policy has decided to establish the Financial Consumer Protection Unit to
address the grievance of both the depositors and the borrowers. All these measures will improve the situation
of financial inclusion and consumer protection in the country.
4. Supporting growth initiative
of Government
With the enforcement of the
Federal Constitution of Nepal 2015, the country has entered into a phase of
political stability. The present government has a strong mandate for 5 years of
which significant time period is left. In such a situation, the executive
can steer the economy in a strong growth trajectory.
To create the climate conducive
to growth the policy is directed towards containing the inflation rate to 6 %
while taking into account the growth objective of 8.5%. It has aimed to
increase the sources of deposits for the BFIs and also aimed to decrease the
lending rate.
The demand for credit has been
increasing, and time and again banks have been facing loanable funds scarcity.
In such a situation, the goal should be to increase the sources of the fund
while also to decrease the rate of interest. The policy has adopted flexibility
regarding the sources of the funds from abroad, eg: deposits from Pension
funds, hedge funds, etc can also be brought, issues of debenture of at least
25% of the paid-up capital of BFIs, etc.
Measures to decrease interest rates are: decreasing the LOLR to 6% from
erstwhile rate of 6.5%, a downward
revision of the interest rate of general refinance and special refinance
facility, decreasing the spread from 4.5% to 4.4%, etc. Similarly, the policy
has continued earlier provisions relating to priority sector lending and
deprived sector lending, ensure the effectiveness of the refinance via a
refinance policy, etc. All these measures will generate adequate resources to
support the growth target of the government.
Conclusion
Nepal has a robust banking and
financial industry. The increase in the presence of BFIs at the local level has
largely increased financial access and inclusion. However, the concerns of
interest rate fluctuations, credit allocation, customer grievances, the
effectiveness of refinancing, etc have been a topic of debate. The monetary
policy aims to address all these issues and thus enhance the stability of the
banking and financial system, while also enhancing the trust of the general
public in overall banking. As such monetary policy is forward-looking and
optimistic.