Monetary Policy to fuel inflation

The Monetary Policy for the current fiscal year 2013-14 is going to increase inflationary pressure failing its own target of containing it at eight per cent as the government has neither effective mechanism to crack whip on increasing market price nor the Policy brought today has any instrument to discipline it.

The central bank today brought flexible Monetary Policy for the current fiscal year 2013-14 reducing cash reserve ratio (CRR) to five per cent for commercial banks, 4.5 per cent for development banks four per cent for finance companies that will add some Rs 15 billion liquidity in the market.
The November 4 election, increased salary of the government staffs recently and now the slashed CRR by one per cent, they all will definately contribute to push the inflation up to double digit.
Likewise, the reduction of statutory liquidity ratio (SLR) to 12 per cent for commercial banks, nine per cent for development banks and six per cent for finance companies and four per cent for micro-finance institutions will also help increase liquidity of the banks and financial institutions, which could also help pump more cash in the market.

But the increased liquidity to propel growth at 5.5 per cent is going to neither contribute to the GDP nor help contain inflation as the country has not been able to increase internal production and largely dependent on imports.
However, the Monetary Policy has tried to channel lending to the productive sectors and increase financial access which will take a couple of years to bear the fruits. Commercial banks have to increase their lending to the productive sector to 20 per cent by the end of this fiscal year, while development banks and finance companies also have to submit their plan to invest a certain per cent of their lending to the productive sector within six months.

The Monetary Policy has also increased the compulsory lending requirement for commercial banks to energy and agriculture sectors to 12 per cent within the current fiscal year from earlier provision of 10 per cent in line with the budget that has prioritised energy and agriculture.

The Policy has reduced interest rates of refinancing to nine per cent to the productive sectors like agriculture, hydropower, poultry, livestock and fishery to five per cent from earlier six per cent.

The interest rate of refinancing for sick industries, cottage and small industries, export business, businesses operated by women and people marginalised communities going for foreign employment has also been brought down to one per cent from 1.5 per cent, the Policy said, adding that the banks and financial institutions could not charge more than 4.5 per cent on re-lending of refinancing.

The Monetary Policy has, however, against the free market operations, fixed the spread rate – the difference between deposit rates on lending rates – at five per cent as according to the central bank the banks and financial institutions have been enjoying higher spread discouraging the borrowers. The fixation of the spread rate, the central bank expected, might bring the lending rate down giving respite to the borrowers. But the general depositors might feel the heat as they will get less interest on their deposits.

“The Policy is expected to maintain financial stability, increase financial access and benefit both depositors and borrowers,” the central bank governor Dr Yuba Raj Khatiwada releasing the Monetary Policy 2013-14, here today.

“The Monetary Policy has been made flexible as it is necessary to help attain high economic growth,” he said, adding that the government has targeted 5.5 per cent economic growth in the current fiscal year and the Policy seeks to increase internal credit by 17.1 per cent, apart from maintaining 16 per cent money supply to support the growth.

The Monetary Policy has key objectives of containing inflation, supporting economic growth and maintaining financial stability. However, it seems the Monetary Policy for the current fiscal year will fail to contain the inflation.

Number of Banks and Financial Institutions go down, branches up

KATHMANDU: The number of banks and financial institutions and micro-finance institutions has reduced due to merger in the last fiscal year. By the end of the last fiscal, the number of commercial banks (Class A), development banks (Class B), finance companies (Class C) and micro-finance companies (Class D) decreased to 207 from last fiscal year’s 213. However, the number of branches of commercial banks increased to 1,486 in the fiscal year 2012-13 from 1,425 a fiscal year ago. The branches of development banks increased to 764 from a fiscal year ago’s 687, whereas the branches of finance companies decreased to 242 from 292. But the branches of micro-finance institutions also increased to 634 from 550, according to the central bank that has revealed that a branch of banks and financial institution is serving around 8,475 people. “There are 11.1 million deposit accounts in commercial banks, development banks and finance companies, whereas the number borrowers stood at 845,000.” By the fiscal year 2012-13, there are 31 commercial banks, 86 development banks, 59 finance companies and 31 micro finance companies, the central bank added.

Key Highlights:

·        Spread rate fixed at five per cent for commercial bank, 4.5 per cent for development banks and four per cent for finance companies

·        Special refinancing rate 1.5 per cent

·        Mandatory 12 per cent lending in agriculture and energy

·        Mandatory 20 per cent lending in productive sector

·         Interest rate on refinancing to agriculture, hydropower reduced to five per cent

·        Deadline to increase paid-up capital to Rs 2 billion extended by the end of this fiscal year. Currently, the banks have been adding reserve capital also, according to the central bank’s directives. But the Policy asked them not to calculate reserve in the paid up capital. Bank of Kathmandu, Lumbini Bank, Everest Bank, Kumari Bank, Laxmi bank, NCC Bank, Siddhartha Bank and Standard Chartered bank Nepal have to increase their paid up capital by the end of the current fiscal year.

·        Stress test mandatory for finance companies too

·        Dynamic provisioning to cushion market risk

·        PCA , if the BFIs fail to maintain adequate liquidity. Currently, such an action is taken only for BFIs’ failure to maintain capital adequacy ratio at the required level.

·        Mandatory to cut down institutional deposits’ share to less than 60 per cent to avoid over dependency

·        A guideline on acquisition on cards

·        The repo and reverse repo process shortened to 21 days from 28 days

·        The base-rate – which was limited to only commercial banks – is mandatory for all BFIs. It is expected to make lending rates transparent

·        The deprived sector lending has been increased to 4.5 per cent for banks, four per cent for development bank and 3.5 per cent for finance companies of their total loans