Nepal Rastra Bank (NRB) has unveiled the Monetary Policy for ongoing fiscal 2021-22 focusing on three core areas: financial sector stability, relief to borrowers severely hit by the COVID-19 pandemic and digital banking as the future of the banking industry.
NRB was at crossroads while formulating the Monetary Policy as to whether to continue the facilities/relaxations provided to borrowers since last year or to review it consciously. The Central Bank came with a midway solution, it has not terminated the rescheduling and restructuring facilities given to the borrowers. However, it is at the discretion of banks and financial institutions henceforth, and BFIs will decide whether the borrower has faced severe setback due to Covid 19 pandemic or not.
The Monetary Policy is focused on financial sector stability and signaled to gradually terminate the relaxations extended previously. The Central Bank had amended provisions of the Unified Directives 2020 prior to unveiling the Monetary Policy and increased the loan loss provisioning of every loan from 1% to 1.3% considering the collateral damage due to prolonged impact of pandemic. Likewise, it has restricted distribution of cash dividend up to the limit of weighted average interest rate in deposits by mid-July 2021. Increase of reserve capital through increment in loan loss provisioning amount and lowering cash dividend and encouraging distribution of bonus shares (BFIs are allowed to distribute bonus up to 30% of the distributable profit) are intended to keep reserves with BFIs to help them face potential collateral damage or loan defaults.
Relaxations extended to borrowers
The Monetary Policy has given continuity to refinancing. However, it is not clear about the size of refinancing. In the previous fiscal, NRB had provisioned refinancing facility of Rs 200 billion, of which Rs 148 billion has been mobilised. Nara Bahadur Thapa, former Executive Director of NRB has said that the Central Bank has limitations as large chunk of the fund has already been mobilised in the last fiscal.
“Announcement of Rs 200 billion refinancing package had encouraged the private sector last year, however, the continuation of same package will allow mobilisation of only Rs 52 billion in this fiscal,’ said Thapa.
The Monetary Policy has provided facilities for rescheduling and refinancing in continuation of the provision of the previous Monetary Policy. However, it is not mandatory for all borrowers, it depends on the concerned BFIs and the impact of Covid 19 on the business of borrowers.
Likewise, if the borrower faces loss for three consecutive years, BFIs must set aside more funds as loan loss provisioning categorising the loan into ‘watch list’. Earlier, the same category and loan loss provisioning was demanded if the borrowing firms or companies went on loss for two consecutive years.
The Monetary Policy has given due priority to the development of MSMEs, tourism entrepreneurs can avail up to Rs 1.5 billion under deprived sector category. Similarly, loan up to Rs 2.5 million for purchase of vehicles for self-employment and Rs two million for any enterprise towards self-employment can be categorised under deprived sector. This provision will encourage BFIs towards direct lending in the deprived sector category. Most BFIs were lending through Microfinance Institutions (MFIs) to meet deprived sector lending criteria that is 5% of the total loan portfolio. Considering the impact in availability of funds to MFIs due to direct lending from the BFIs, the Central Bank has introduced mandatory provision for MFIs to issue debentures up to 25% of their paid-up capital.
BFIs need to limit the interest rate within additional two percentage points as premium on top of the disclosed base rate for the loan amount of Rs 10 million or less. SMEs can avail loan with rational interest rate from this provision. As per the regulatory requirement, BFIs mandatorily needs to maintain 15% of the total loan portfolio with loan amount of Rs 10 million and less in agriculture, energy and MSMEs by fiscal 2023-24.
The Central Bank has stated that another provision introduced in the Monetary Policy that allows lending up to Rs 500,000 (five lakhs) to cooperatives except saving and credit cooperatives would help inclusive development of micro, cottage and small enterprises throughout the country. However, experts have raised eyebrows on this provision as the loan extended to the cooperatives could fall into risk as such cooperatives are not regulated properly.
In addition, the Monetary Policy hooked down the interest rate spread from 4 percentage points to 3 percentage points which is good news for borrowers and depositors. High intermediation cost of BFIs in the past had created the difference of 3000 basis points between lending rates and deposit rates.
Focus on stability
BFIs have provided relaxation through capitalisation of interest, rescheduling loan repayment and also extended working capital to their borrowers to help them combat with Covid 19 pandemic, as per the regulatory requirement. The pandemic has created great uncertainty for businesses, livelihoods and the economy. Maha Prasad Adhikari, Governor of NRB said, ‘Considering the difficulties faced by borrowers we have not terminated the relaxations extended throughout the year in fiscal 2020-21.’
However, experts say the Monetary Policy 2021-22 is friendlier to BFIs.
The Central Bank has introduced Credit to Deposit ration from ongoing fiscal scrapping to CCD (credit to core capital cum deposit) ration. Earlier, BFIs were asked to maintain 80% CCD, which was slightly relaxed up to 85% last year to encourage resource mobilisation. As a result, credit mobilisation in private sector increased by 26% against the target of 20%. As BFIs have around Rs 300 billion as tier 1 or core capital, the CCD provision of 85% generated more resources than credit amount that can be generated from the 90% of deposits as per the current provision. The Central Bank has slightly minimised the credit growth target to 19%. The Monetary Policy keeps the cash reserve ratio (CRR) unchanged at 3% and statutory liquidity ratio (SLR) at 10, 8 and 7% for Class ‘A’, ‘B’ and ‘C’.
BFIs have the discretion on rescheduling and restructuring of loans based on their judgment of the borrower. The ‘watch list category’ is further reviewed by the Monetary Policy that helps BFIs lessen the loan loss provisioning amount which could skyrocket as most borrowing firms/companies might have been facing loss since the beginning of pandemic.
The Monetary Policy has given continuity to refinancing. However, it is not clear about the size of refinancing. In the previous fiscal, NRB had provisioned refinancing facility of Rs 200 billion, of which Rs 148 billion has been mobilised.
The Central Bank has fixed 2% interest rate for short-term deposit instruments called reverse repo. When NRB mops up the excess liquidity, BFIs get 2% interest rate from the previous 1% prevalent earlier. The Central Bank has been executing interest rate corridor to control rapid fluctuation in interest rate through hooking up short-term interest rate within 2 to 5%. Short-term deposit collection rate is at the bottom lower end and Standing Liquidity Facility (SLF) rate is at the upper limit of the interest rate corridor.
The Monetary Policy 2021-22 has also relaxed the consortium financing limit from Rs one billion earlier to Rs two billion and above henceforth. Consortium financing was introduced to minimise the risk of single BFIs in bigger loans.
Stringent criteria on margin lending and overdraft
The Monetary Policy 2021-22 has tightened margin lending, a single borrower is capped at Rs 40 million from a single financial institution (source) and total limit is Rs 120 million. As the share market has been booming over the last several months, the loan mobilised in the share market in the last one year is estimated to have increased by two-folds with cumulative loan against collateral of securities (shares) is Rs 100 billion where market capitalisation is Rs 4,443 billion. The Monetary Policy has stated that the Central Bank will issue a guideline for transparency and effectiveness of overdraft and working capital loan.
Facilities for merger and acquisition
The Monetary Policy 2021-22 has also given priority to the consolidation of financial institutions. Financial institutions opting for merger and acquisition will get facilities like relaxation on regulatory lending requirement; 0.5 and 1 percentage point relaxation in CRR and SLR, respectively; single depositor’s deposit limit can be increased by 5 percentage points and one percentage point upper side spread rate can be considered till fiscal 2022-23. Also there would not be restriction for Board of Directors and high-ranking management officials to join other BFIs within six months.
BFIs will also get one year additional time from the date of joint operation to regularise the credit-deposit (CD) ratio, even though it goes up to the regulatory threshold of 90% while initiating joint operation with merged or acquired entity. BFIs don’t need to get approval of Central Bank to merge or shutdown branches with one km radius. Fit and proper test is relaxed if the promoter shareholder of commercial banks holding 0.10 or less are willing to offload share. Any financial institution acquiroing any BFIs that has been declared problematic can avail all the aforementioned facilities, according to the NRB, “If the province level BFIs initiated merger and acquisition, they will be granted permission to set up corporate office at the appropriate location and set up representative office at provincial or national capital. Following the merger and acquisition, shareholder can contest for Board of Directors only from one category, either from promoter or public.
Promoting digital banking
The Monetary Policy has given emphasis on digital banking and announced fiscal 2021-22 as ‘digital payment promotion year’ through developing infrastructure both physical and legal as well as raising awareness and ensuring security. Introduction of E-KYC (electronic KYC) might lure more tech-savvy youth into digital banking in the coming days. To mitigate the growing concerns on digital divide and to promote digital banking, the Monetary Policy 2021-22 announced mobilising special refinancing in a bid to expand broadband internet service in rural parts of the country.
The Monetary Policy has addressed few other concerns aligning with national priority, it has also announced refinancing facility for the installation of charging stations to promote electric vehicles (EVs). Additionally, the Monetary Policy has announced to facilitate loans for development of 100 bed hospitals at the local level lacking lifeline hospitals and similar facilitation will be extended to institutions providing technical and vocational education to avail loan.
Most importantly, to encourage remittance through formal channels, the Monetary Policy has special announcement of providing 1 percentage point additional interest on remittance deposits through banking channel.