The Nepal Rastra Bank (NRB) has brought the Monetary Policy on Thursday on the basis of the budget for fiscal year 2073/74 that aimed for achieving economic growth rate of 6.5 percent and limiting inflation to 7.5 percent. NRB Governor Dr Chiranjeevi Nepal, considered a proponent of liberalized economic system, has brought a strict Monetary Policy against his image. The Monetary Policy has many mandatory provisions to increase access of remote and rural areas, and poor to banking service, increase investment in the productive sector and maintain good governance in the banking sector.

The policy brought just two days before the start of new fiscal year has a provision of implementing interest rate corridor (IRC) to keep interest rate stable. The then governor Dr Yuba Raj Khatiwada three years ago had announced implementation of IRC but the central bank has yet to implement it. The upper limit for the IRC will be determined by the rate of facility for stable liquidity and the lower by the interest rate of deposits collected in the last two weeks. Inter-bank rate and the rate for repo also should fall within the range.

President of Nepal Bankers Association (NBA) Upendra Poudel welcomed the provision for IRC and said that will help in maintaining the interest rate of banks within a certain range. “There was a huge risk due to massive fluctuations in interest rate in our market. Interest rate will remain within a range after this provision. This will benefit everybody,” he added. Investment in agriculture and hydropower is expected to rise after the Monetary Policy increased threshold for investment in the two sectors to 15 percent of total loan mobilization keeping the threshold for productive sector unchanged at 20 percent. This, however, can result in fall in investment in other productive sectors apart from the two. The NRB has also brought tougher provisions to increase lending to the impoverished class. The threshold for impoverished class loan has been left untouched at five percent but there is a mandatory provision requiring banks to make direct investment for two percent out of that. Banks earlier were investing that through microfinance institutions and cooperatives. The banks that were ready to pay fine instead of lending the set proportion will now must go to villages to reach to the impoverished class. The central bank has acted tougher at a time when bankers were lobbying for doing away with impoverished class loan.

Similarly, there is refinancing to open hotels for the first time to develop tourism sector. It also has provision for normal refinancing for establishing standard hotels at places like Pathibhara, Maipokhari, Halesi, Langtang, Swargadwari, Upper Mustang, Gadimai, Janakpurdham, Rara and Khaptad with tourism potential but that have not been relatively developed in terms of tourism. It has also encouraged banks to invest in tourism. It will provide special refinancing at an interest rate of one percent equal to the amount of export if one were to rear ostrich and bee and grow cardamom, and export them to promote agriculture.

It has also acted tough on margin lending and real estate loans probably deeming that banks and financial institutions may have been increasing investment there at a time when they have excess liquidity and interest rate is low. Banks will have an added challenge of looking for new sectors to invest as a result. The NRB has set a spread rate of seven percent even for microfinance institutions at a time when banks have been demanding removal of spread rate.

There are complaints that microfinance institutions have been charging exorbitant interest rate. Interest rate charged by microfinance institutions can now fall to around 15 percent from around 24. This will reduce profit of microfinance institutions. Similarly, registration of new microfinance institutions has also been stopped apart from nine districts.

There is also mandatory provision requiring banks earning a high profit to spend some percent of that on social service and institutional good governance. They will have to invest one percent of profit on corporate social responsibility and three percent of total expenditure on training and development of staffers. Similarly, mandatory training for board members will also help in institutional good governance.

The Monetary Policy has projected to raise total internal loan to 25 percent and private sector loan to 20 percent. The target for expansion of loan is challenging at a time when investment environment has been vitiated due to political instability. It has also reduced the limit of cash transaction to Rs 3 million from Rs 5 million. It will increase banking transaction and reduce cash transaction. This will help the central bank in management of cash. Success of any policy depends on implementation. So, implementation of the Monetary Policy will determine its success. There is a provision to review the Monetary Policy in every three months this time and one can hope that the monetary targets can be achieved if the problems faced were addressed by the quarterly reviews.