Wednesday, July 25, 2012

Monetary Policy dashes hopes of private sector

Monetary Policy for the current fiscal year seems to have dashed the hopes of private sector, though it might boost the confidence of the depositors due to rise in deposit insurance amount.
"The private sector has been expecting to get some relief in the form of interest rates reduction due to Monetary Policy measures," said vice-president of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) Pashupati Muraraka, after the central bank governor released the Monetary Policy 2012-13 here today.
But the central bank increased the Cash Reserve Ratio (CRR) to six per cent for commercial banks, 5.5 per cent for development banks and five per cent for finance companies to mop up excess liquidity in the financial system.
"The increase in CRR will increase cost of fund of the banks and financial institutions," said Nepal Bankers Association vice president Rajan Singh Bhandari.
Last fiscal year's Monetary Policy had reduced CRR to five per cent to deal with liquidity crunch in the financial system.
"Increase in CRR will be effective in absorbing some of the excess liquidity preventing any negative push towards inflation in the absence of effective channel to mobilise excess funds," according to senior economist Prof Dr Bishwambher Pyakuryal, who has also served as the central bank's board member.
However, the private sector fears that the interest rate — that has increased the cost of doing business — might not come down as was expected due to excessive liquidity in the financial system because of hike in CRR.
"At a time, when there is no demand for the credit due to high interest rates, the Monetary Policy has also prescribed deposit insurance of up to Rs 300,000 from the current 200,000 that will again increase the cost of fund of the banks and financial institutions as the Deposit and Credit Guarantee Corporation (DCGC) has not yet reduced the deposit insurance premium," said Nepal Finance Companies Association Rajendra Man Shakya.
"The increase in deposit insurance will boost the confidence of depositors on the financial system but at the same time the banks and financial institutions' expenses will rise," he said, asking the central bank to help reduce premium rate.
Similarly, the 10th Monetary Policy has, though claimed of using the free market instrument, tilted towards the directed lending, which without developing the forward and backward linkage could distort the market in the long run due to oversupply in one sector.
"Without expanding the area — by developing forward and backward chain — with a long term vision, the directed lending will create over supply and again add pressure on the financial sector," Pyakuryal added.
After the NRB Act 2002 gave the central bank an autonomous status, it started to formulate sound comprehensive monetary policy and strategies to stabilise financial sector, inject money for the economy that could help grow as targeted by the fiscal policy and check inflation. But it is the second time that the central bank has brought monetary policy in an absence of full-fledged budget.

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