Monetary Policy Targets Economic Revival WILL IT DELIVER?

Nepal Rastra Bank has unveiled relief-centric Monetary Policy to address the economic crisis caused by the ongoing COVID 19 pandemic. The Monetary Policy 2020-21 has received overwhelming response from the private sector as it has provided flexible moratorium for loan repayment considering severe impacts caused by the pandemic. Though the private sector has expressed satisfaction over the policy announcement, they’ve also expressed doubts on the proper execution of the subsidised credit and refinancing package. The foremost attraction of the monetary policy is loan restructuring and rescheduling facility for borrowers affected by the pandemic. The flexible moratorium has been given by the Central Bank classifying less affected, moderately affected and severely affected. Based on the classification, the Central Bank has offered six months loan rescheduling facility to all borrowers, nine months for moderately hit and twelve months with grace period of additional one year for severely hit businesses like, tourism, hotel projects under construction. However, it is not clear whether Central Bank or the lending institutions will classify the moderately hit or severely hit businesses while executing the facility extended by the Central Bank through Monetary Policy 2020-21. The monetary policy has stated that the severely hit borrowers who have regularly served (repaid) the debt till first half of fiscal 2019-20 can reschedule loan repayment period for a year with interest rate capitalisation after paying 10% of the interest accrued during that time. Businesses that are facing crunch in cash flow will receive working capital up to 20% of existing loan portfolio to operate in the new normal. Providing flexible moratorium for all borrowers and keeping financial sector stability are like a double-edged sword. The Central Bank must find a mid-way to manage mutually exclusive things. Banks have witnessed regular debt servicing in 70% of their total loan portfolio at the end of the fiscal year 2019-20. “We’ve provided six months moratorium for every borrower and this is the time when the banks and financial institutions (BFIs) should express solidarity with their borrowers to boost their confidence,” said NRB Governor Maha Prasad Adhikari, “If banks offer flexibility during this difficult time, it will boost confidence of clients towards the financial system, and can be taken as strong factor for stability.” He reiterated that the NRB has cautiously addressed the issues of the borrowers with monetary stimulus without compromising regulatory measures for financial sector stability. Revival of Economy

Easy availability of loanable funds

Another prime focus of the monetary policy is making easy availability of loanable funds for the recovery of the economy. Non-medical measures like the lock down, social distancing, travel restrictions and others to stem the spread of corona virus has created manifold impacts on the economy and a tepid growth of below 1.5% could be achieved in the previous fiscal 2019-20. Against this backdrop, the NRB has made loanable funds easily available and adopted few measures to reduce the cost of fund in a bid to lure private sector to book high profit mobilization through low interest rate credit from BFIs. The government has lifted the nationwide lockdown which was imposed starting March 24 to July21. It is expected that the loan demand from the private sector could rise as economic activities will reopen in the new normal situation. The monetary policy has expanded the size of refinancing fund to Rs 190 billion, five times from the existing refinancing facility at Rs 38 billion. The fiscal budget so far has announced Rs 50 billion in subsidized credit facility for severely hit sectors. Borrowers can utilise refinancing and subsidised credit facility at 5% interest. Apart from this, Central Bank has increased the credit to core capital cum deposit (CCD) ratio to 85% from 80% earlier.

Businesses that are facing crunch in cash flow will receive working capital up to 20% of existing loan portfolio to operate in the new normal.

“This will generate around 180 billion in liquidity in the banking system,” said Gunakar Bhatta, Spokesperson and Head of the Research Department of NRB. The Central Bank is flexible towards boosting imports as the monetary policy targets to keep foreign exchange reserve to cover imports of only seven months from the current robust position that is sufficient to cover imports of a year. It means Central Bank will not worry about depletion of reserves and let imports surge for revenue generation and revival of the economy. As the government has decided to raise domestic debt worth Rs 225 billion in this fiscal, the Central Bank has narrow down the cash reserve ratio (CRR) requirement by one percentage point to 3% effective hereafter to facilitate the government raising debt without creating crowding out effect in the private sector.

Interest rate stability and reduction on cost of fund

The monetary policy has taken some steps to reduce the cost of fund and keep the interest rate stable. It has announced effective hedging facility to cover the risk of exchange rate fluctuation especially for foreign investment in the infrastructure sector. The Central Bank has already opened the external commercial borrowings (ECB) for BFIs to mobilise foreign resources when domestic resources shrink. Availability of subsidised credit worth Rs 240 billion will also pull down the interest rate of the market as banks flushed with liquidity have already started to bring down the interest rate. The monetary policy has fixed the service fees and barred BFIs from charging additional fees not defined by the Central Bank. Similarly, the monetary policy has also revised the rate of upper and lower limit of the interest rate corridor at 5% and 1% respectively. Interest rate of the standing liquidity facility (SLF) is the upper limit and rate of the reverse repo is the base (lower limit) of the corridor. The Central Bank has said it will effectively execute the interest rate corridor to hook the long term rates like: credit and deposit rates and stabilise them. The Central Bank has also brought reverse repo rate to 1% from 2% earlier to discourage banks from depositing funds in the Central Bank and rather encourage lending. Banks can borrow from the Central Bank at 3% (repo rate) from 3.5% earlier. The Central Bank has opened up avenues to mobilise long term resources through selling energy and agriculture bonds. Banks can buy the bonds issued by the specialised banks to meet the lending requirement in agriculture and energy, like the banks can buy bonds issued by the Agriculture Development Bank (specialised bank to lending in agriculture sector) to meet the credit requirement of 15% by 2022-23. “The year 2020-21 is the year of economic revival which is why we have provided monetary incentives to the private sector hit hard by the pandemic to shorten the time of their revival,” said Bhatta, Executive Director and spokesperson of NRB, “This is an opportune time for the private sector to accelerate their operations and book high profits.” If the private sector starts mobilising the credit as targeted by the Central Bank, it will help the government to achieve the growth of 7% as well as create job opportunities in this pandemic. For inclusive development and to expand the access to finance for the development of micro, small and medium enterprises (MSMEs), commercial banks should issue loans below the ticket size of Rs 10 million to 15% of the total portfolio by 2023-24.

By the end of 2023-34 banks have to raise the lending to 40% in agriculture, energy and MSMEs, 15% in agriculture and MSMEs and 10% in energy.

40% loan must be in the priority sector

The monetary policy has oriented BFIs to lend in the productive/priority sector. As per the existing provision, banks have to lend 25% of their loan to agriculture, hydropower and tourism. However, by the end of 2023-34 banks have to raise the lending to 40% in agriculture, energy and MSMEs, 15% in agriculture and MSMEs and 10% in energy. Agriculture lending requirement should be met by 2022-23 according to the monetary policy. The objective of orienting banks to lend in productive sector is to develop a more resilient economy with strong production base, according to the Central Bank. The Central Bank’s intention to limit the ticket size of each refinancing credit to Rs 50 million is to ensure sufficient funding for MSMEs and lure more MSMEs to avail loans and bring them into the formal sector and the tax bracket.

Protecting depositor interest

Banks borrow money to lend. Without attracting deposits it will not be possible to expand credit. The monetary policy has also protected the depositor’s interest. The Central Bank has lowered the interest rate in reverse repo to nominal 1% to discourage banks to park funds in the Central Bank. This provision will compel banks to lend and the deposit rate will not go too low when banks increase lending. Likewise, the Central Bank has put a cap on distribution of bonus at only 30% of the distributable profit by the end of fiscal 2019-20 and tied up per share bonus with the average deposit rates of the particular time. Targeting professionals and employees, the Central Bank has slightly revised the loan to value (LTV) ratio of individual houses to 60%. Those going to buy a house for the first time can avail 60% loan from the BFIs; this will support the real-estate sector. However, the monetary policy has kept the LTV ratio of automobiles at 50% to the chagrin of automobile entrepreneurs.

Challenges in refinancing utilization and creating credit demand

Though the Central Bank has envisaged economic revival through easily available funds for the private sector that has undergone a major shock, it is yet uncertain that the demand for loans will rise. There is also slim chances of utilisation of the refinancing facility. The Central Bank has presented a high sounding monetary policy circulating around Rs 240 billion in credit and subsidised interest rate of 5%. The Central Bank has almost doubled the refinancing facility announced by the budget, and it has contrarily narrowed down the threshold of credit (ticket size) to Rs 50 million. The threshold of the refinancing is heavily insufficient for medium and large scale borrowers while it is an understood fact that most MSMEs do not apply for loans. While the Central Bank mobilises refinancing facility of Rs 190 billion, stakeholders are seeking a transparent and hassle free procedure for the proper utilisation of this facility. Pawan Golyan, Chairman of Golyan Group, who also leads the Confederation of Banks and Financial Institutions (CBFIN) has said that the threshold of refinancing credit is minimal for medium and large sized businesses. As BFIs are flushed with liquidity, the Central Bank may have to mop up more funds from the market through its monetary operations until return to normalcy if the private sector is not able to demand more loans in this pandemic.

Monetary Incentives and Targets

• Loan Restructuring and rescheduling facility – Six months for every borrower affected by the pandemic, 9 months for moderately hit, and one year for severely hit with an additional year grace extension for the tourism industry • Refinancing facility- Rs 190 billion (with threshold of Rs 50 million for each) • Subsidised credit facility- Rs 50 billion • Interest rate for subsidised and refinancing credit- 5% • Broad money supply - 18% • Private sector credit expansion- 20% • Inflation- 7% • Repo rate- 3% • Foreign Exchange Reserve- Sufficient at least to cover imports of 7 months • Priority sector lending- 40% by fiscal 2023-24 • Loan to MSMEs- 15% of the total portfolio by fiscal 2023-24 • Subsidised lending- Every branch of commercial banks and development banks should issue 10 and 5 units of subsidised loan