Monetary Policy for 2021/22 Nepal

Nepal Rastra Bank unveiled its monetary policy for 2021/22 on August 13, 2021. Here is a summary of the main policy provisions.

Monetary Policy Stance and Targets 

• Monetary policy will take balanced stance.

• Inflation target is 6.5 percent, targets for broad money growth is 18 percent and credit to private sector growth is 19 percent.

• Foreign reserve adequacy to be maintained for at least 7 months of import. 

• CRR kept unchanged at 3 percent, SLF kept unchanged at 5 percent, SLR ratios for the A, B and C class banks kept unchanged at 10,8 and 7 percent. 

• Interest rate corridor band narrowed to 2 percent (lower limit), 3.5 percent (repo rate ) and 5 percent (upper limit).

Resource Mobilization and Credit Management 

• B, C and wholesale lending D class institutions has to issue debenture of at least 25 percent of paid up capital.

• The current provision for agriculture and energy bonds will be continued. 

• One percent additional interest to be provided to the deposits made out of the remittance received.

• The provision for commercial banks to disburse minimum 15 percent loan to the MSMEs is to be continued.

• Loan under deprived sector will be redirected to MSMEs gradually.

• Following loans can be recorded as deprived sector loan:

• -Loan up Rs. 1.5 million provided to the self-employed businesses who lost their employment in tourism sector due to COVID.

• -Loan up to Rs. 2.5 million to purchase a vehicle for self-employment purpose.

• -Project loan up to Rs.  2 million provided to female entrepreneur   

• -Project loan up to Rs.  2 million provided to agricultural businesses 

• Concessional loan program will be made further effective.

Recovery Related Programs 

• Refinance facility will be continued up to the refinance amount provided last year. It will be focused on MSMEs.

• The business continuity loan program will be made further effective to revive the hard hit sectors from COVID such as party palaces, tourism businesses, fitness centers, cinema halls and others.

• Firms having a net loss of three years will be reported as watch last compared to a net loss of two years in the existing provision.

• BFIs are allowed to reduce the EMI by increasing the payment period for the COVID affected businesses.

• Due payment of July 2021 can be deferred up to January 2022 for the affected businesses from the prohibitory order issued by the government.

• The interest amounts for the tourism businesses depending on international tourists to be recorded separately till July 2022. No interest penalties or late fees to be charged on such loans.

• The due payment up to January 2022 for highly affected businesses can be deferred by one year. Suh loans can be restructured or rescheduled by January 2022.

• Loan up to Rs. 200000 can be provided to public transports for maintenance/operation purpose.

• The current provision of CCD ratio is scrapped. Credit deposit ratio of 90 to be maintained by the BFIs from now onwards.

• The minimum amount for consortium loan has been increases to Rs. 2 billion from Rs. 1 billion.

• Special refinance will be provided to the internet service providers in the rural area.

• The LTV ratio for share margin loan kept unchanged at 70 percent.

• The maximum limit of share margin loan is fixed at Rs. 40 million per borrower per bank and Rs. 120 million in total per borrower.

Financial Sector Strengthening 

• Second financial sector development strategy and the fourth strategic plan of the NRB will be brought to implementation.

• Commercial banks will be encouraged for merger with the following incentives:

• -0.5 percentage point reduction in CRR.

• -One-year extension for the sector lending limit. 

• -One percentage point reduction in SLR.

• -5 percentage point redemption institutional deposit per institution.

• -No cooling period of 6 months.

• -Spread rate can be increased by one percentage point.

• -One-year extension for the CD ratio to be brought down to 90 percent.

Regulatory and Supervisory Provisions 

• The provision for maintaining counter cyclical buffer has been postponed for the commercial banks till July 2022.

• BFIs have to disburse term loans in fixed interest also and publish the details in their financial statements.

• The provision for maintaining the spread of 4.4 percent has been kept unchanged. 

• The methodology for calculating base rate will be revised and the provision for the BFIs to add the premium rate to the base rate while determining interest rate has been continued. However, the BFIs are allowed to add only 2 percent premium in case of SME loan up to 10 million. 

• The existing provision for project based loans will be made further effective. 

• Guidelines about overdraft facility will be made to make such loans more transparent and effective.

• The A, B and C class banks have to  submit their reports through the Supervisory Information System (SIS).

• Coordination will be made for the consolidated supervision of the sister organizations of the BFIs.

• Policy coordination and technical assistance will be provided for the regulation as well as supervision of the saving and credit cooperatives.

• The existing provision for the BFIs for blacklisting their customers will be revised.

• Existing regulations for the hire purchase institutions licensed by the Bank will be revised. 

• Independent evaluation will be done to assess the effectiveness of refinance facilities, concessional loan and business continuity loans provided to recover the economy from COVID crisis.

• Guidelines for managing the corporate social responsibility of the BFIs will be issued.

• BFIs will not be required to take permission to open contact offices in Karnali and Sudurpaschim provinces.

• Electronic Know Your Customer system will be developed.

Microfinance 

• The wholesale lending microfinance institution can be merged with retail MFI and work as retail MFI.

• The MFIs having the cross holding of the BFIs have to be merged by July 2022.

• Provision will be made for the BFIs to provide loan of Rs. 500000 per member to the members of the cooperatives other than saving and credit cooperative for the purpose communal agriculture. 

• The national level MFIs have to publish their financial statements according to the Nepal Financial Reporting Standards.

Payment System

• Focus will be given on development of necessary infrastructure and literacy to celebrate 2022/23 as Digital Payment Promotion Year.

• National Payment Gateway will be established while ensuring interoperability of the payment instruments.

• Special refinance will be provided to the PSP, PSO and telecom providers that invest in the development of payment ecosystem development and promotion.  

• The limits on different payment instruments will be revised.

• Necessary coordination will be made to receive all types of revenue of the government and carry out all types of payments through digital payment channels.

• The targets for transactions and customers put for the PSOs and PSPs has been postponed till July 2022 due to the COVID crisis.

• The PSP and PSO will be encouraged to extend digital payment services to the customers of microfinance institutions and cooperatives.

• Digital lending framework will be implemented to facilitate the process of receiving application for loan, process it and disburse the loans.

• Feasibility study of Central Bank Digital Currency will be made.

• Provision will be made to purchase the citizen saving bond and Foreign Employment Bond through digital channels.

• Feasibility study will be done for using cloud infrastructure to ensure the safety of the information related to the payment system.

• Feasibility study will be done regarding digital banking and microloans from the PSPs and PSOs so as to promote micro, cottage and small industries as well as start ups.

• Provision will be made for the PSPs and PSO to report the details suspicious transactions and transactions above a certain limit to the Financial Information Unit of NRB.

Foreign Exchange 

• Necessary revisions will be made regrading the foreign exchange facilities to import services by Nepali institutions/organizations.   

• Provision will be made for the airlines to obtain foreign exchange facilities up to 25000 USD directly through the BFIs for service import. 

• Provision will be made whereby Business Creditability Information is not mandatory for the payments of specified amount through draft and TT.

• Provision will be made for the commercial banks  to avail foreign exchange facilities to the national priority projects for service import from foreign institutions.

• Necessary revision will be made regarding the list of products that can be imported from Indian by paying US dollars.

• Provision will be made to waive foreign currency transactions license renewal fees for the licensed institutions such as money changer, hotel, travel and others till July 2022.

• The provision for foreign exchange required to purchase software by the institutions and online advertisement will be made further effective through coordination among the regulators.

• Provision will be made for the merger and acquisition of the remittance companies.

• Necessary revision will be made regarding the limit of foreign currency holding by Nepali individuals and foreign currency exchange.

• Necessary facilitations will be made regarding the import of life saving drugs and health equipment.

• Study will be done regarding the possibility for the remittance companies in the countries that have difficulty to pay remittance in USD to pay the remittance in local currency through the agency account of this bank.

• The provision for 500 USD e-card provided to Nepali citizens will be made further effective by assessing its effectiveness.

Customer Protection

• The draft of the Financial Customer Protection Act will be prepared.

• BFIs are require to place the link of Customer Grievance Portal of NRB in their websites.

• Necessary study will be done for the Provincial Level Financial Institution in Karnali and Sudurpaschim Province.

• Special monitoring and supervision will be done for the reporting institutions to assess the risks identified by the National Risk Assessment Report, 2020.    

I can be reached at siddhabhatta@gmail.com 

The formal document of the policy in Nepali Language is available here.