Monetary Policy reduces CRR by 50 basis points

The central bank brought a cautious Monetary Policy for the fiscal year 2011-12 that however could be a little embarrassing for the fiscal policy.
The Monetary Policy has reduced the Cash Reserve Ratio (CRR) by 50 basis points or 0.5 percentage point to five per cent. “To ease the liquidity situation, the policy has reduced CRR by 0.5 percentage point to five per cent," said central bank governor Dr Yubraj Khatiwada. The revised CRR is estimated to instantly release around Rs 4 billion in the financial system.
However, the banks have to reduce their Credit to Deposit (CD) ratio by the mid-January – that is in six months to – 80 per cent from current 85 per cent, which will curb the lending capacity of the banks.
The Monetary Policy has targeted seven per cent inflation and five per cent growth rate following the budget for the current fiscal year 2011-12.“To support the budget’s growth rate of five per cent, the central bank is planning 12.5 per cent broad money supply," Khatiwada said without elaborating its implications on price hike. In the last fiscal year too, the Monetary Policy had aimed seven per cent inflation and planned 15 per cent money supply.
However, the money supply remained 3.5 per cent – of commercial banks – and 7.3 per cent including commercial banks, development banks and finance companies. But the inflation remained over 10 per cent in an average.
The central bank governor accepted that the overall macroeconomic policy needs revision as the Monetary Policy could not achieve inflation and Balance of Payment (BoP) target. The BoP that was Rs 11.67 billion deficit in the first 10 months of the fiscal year, has however, recorded a ‘miraculous’ surplus of around Rs 1 billion by the end of 2010-11, he said, attributing 'surprise surplus' to foreign grants and aids released in the last month.
For the current fiscal year, the Monetary Policy has targetted Rs 5 billion BoP surplus.
The Monetary Policy did not change bank rate – the most awaited by the banks and financial institutions – refinancing rate and Statutory Liquidity Ratio (SLR), but promised to revise refinancing according to liquidity need.
The Monetary Policy has however increased foreign exchange facilities as a citizen can get exchange facility of $2,500 for once or $5000 in a fiscal year at maximum revising the facility from last fiscal year's $2000 and $4000.
Similarly, NRNs can open bank account in foreign currency and special arrangement will be made for Nepalis also to open bank account in foreign countries. "The banks can exchange foreign currency up to $1,000 provided the beneficiary supplies credible source of foreign exchange with identity," according to the Monetary Policy that has increased deprived sector lending to 3.5 per cent, though in phase-wise manner to increase this rate by 0.5 percentage point for next two years due to failure in directing lending towards productive sector and deprived sector
The Policy has addressed the crisis of trust on banking channels by extending deposit insurance up to Rs 200,000 to commercial banks as well to make the small depositors feel safe. The banks and financial institutions deposits have also seen a rise of 8.2 per cent to Rs 788.72 billion by the end of fiscal year.
However, the foreign exchange reserve has increased by a mere Rs 2 billion in a fiscal year to Rs 270 billion in the fiscal year 2010-11 from a fiscal year ago's Rs 268 billion.
Though, merger has become a buzz word in the recent days, the Monetary Policy has offered nothing to encourage mergers. Apart from encouraging the banks and financial institutions to open branches in the selected nine districts, where there is no access to finance, the Policy has increased the deprived sector lending and directed to banks and financial institutions to include a collateral free loan of up to Rs 200,000 for the study of technical education under deprived sector lending.
The micro finance institutions will also be encouraged to go to the districts, where there is no financial access, it said.

Monetary Policy target for the fiscal year 2011-12
Growth: five per centInflation: seven per cent
Broad Money Supply: 12.5 per cent
Balance of Payments surplus: Rs 5 billion
Deposit growth: 13 per cent

Achievement in fiscal year 2011-12
Growth: 3.47 per cent (by the first half of FY)
Inflation: 9.6 per cent (by the first 10 months)
Money Supply expansion: 3.7 per cent (by the first 10 months)
Balance of Payments: Rs 1 billion surplus (end of fiscal year)
Foreign Exchange Reserve: Rs 270 billion (end of fiscal year)


Fiscal Policy keeps mum on cooperatives
The Monetary Policy is silent on cooperatives supervision and monitoring as spelt by the budget. The Monetary Policy is supposed to support the budget – the government's Fiscal Policy – however the central bank is in a fix by the government obsession to the cooperatives and bringing them under the central bank.
The government has without homework and consultation has asked the central bank to monitor the cooperatives but the banks and financial institutions come under the Nepal Rastra Bank Act, Bafia and Financial Crime Act, whereas the cooperatives are under the Cooperatives Act. The NRB Act does not allow the central bank to monitor let alone punish the cooperatives.
The central bank – the regulatory authority of monetary market -- currently supervise and monitor 219 banks and financial institutions including 31 commercial banks, 87 development bank, 80 finance companies (78 in operation), and 21 micro finance development banks.
At a time, when the central bank has not been able to supervise the banks and financial institutions that it has licenced due to lack of enough manpower has been asked by the government to supervise the cooperatives that could lead to more casualties.
The central bank board members are against the inclusion of cooperatives against the NRB Act under the central bank.