CNI welcomes new monetary policy

KATHMANDU: Confederation of Nepalese Industries (CNI) has expressed support for monetary policy for the fiscal year 2024/25, aimed at revitalising the economy after three years of sluggish performance.

Nepal Rastra Bank (NRB) is attempting to stimulate the economy by revising its previous policy of reducing overall demand. CNI has welcomed these efforts to rejuvenate economic activity.

Lowering the policy rate is seen as a positive step, as it reduces production costs and increases competitiveness. However, the central bank must ensure that the policy rate is effectively reflected in the bank rate. It is commendable that the upper limit of the interest rate corridor is maintained at 6.5% and the policy rate at 5%. However, with banks and financial institutions (BFIs) under pressure from 'Tier 1 Capital', the central bank must adopt policies that facilitate achieving the target. The monetary policy did not address the need to suspend the Counter Cyclical Capital Buffer (CCB) to support Tier 1 Capital. Without reconsideration, achieving the target of 12.5% credit expansion in the private sector is unlikely. In a press statement, CNI suggested postponing the current 0.5% CCB as it is inappropriate in the current situation.

CNI has appreciated the central bank's commitment to study the existing base rate regime to make the monetary diffusion mechanism effective and maintain competition in loan interest rates. CNI has recommended abolishing the provision regarding the base rate.

The reduction in overall demand has significantly impacted the productive and construction sectors. The measures taken to support the construction sector's re-establishment are positive. CNI believes that the monetary policy's approach to the construction sector will make it dynamic and help the economy. However, the manufacturing sector showed a 2% decline in the third quarter of 2023/24 compared to the same period in 2022/23. CNI has urged attention to the fact that if the struggling productive sector is not encouraged, further relaxation may be necessary.

Although reducing the existing 1.20% loan loss provision on good loans to 1.10% is positive, it is not sufficient. CNI has suggested that the central bank should aim to reduce the loan loss provision to no more than 1%. Increasing the limit of the Regulatory Retail Portfolio (RRP) from Rs 20 million to Rs 25 million is seen positively by CNI, as it will help reduce Non-Performing Loans (NPL) and their provisioning by BFIs. The commitment to establish an asset management company to manage passive and non-banking assets of BFIs is also positive.

Extending the time period to adjust loans through variance analysis mentioned in the Working Capital Loans guidelines is positive, but it will be effective from 16 July 2025. Given the extreme contraction in market demand and the adverse situation faced by industrial businesses, the provision of Working Capital Loans should be postponed for now.

CNI has suggested carefully reviewing the existing credit notification and blacklisting directives to amend provisions such as blacklisting based on cheque dishonour and banning banking transactions.