Friday, July 17, 2020

Central bank unveils expansionary Monetary Policy, containing inflation is a challenge

The central bank today unveiled please-all expansionary Monetary Policy for the current fiscal year 2020-21 aiming at rescuing the ailing economy that has been hit by the Covid-19 but faces a risk of failure of containing the inflation, one of the objectives of the Monetary Policy.
After being appointed governor of the central bank three months ago, Maha Prasad Adhikari unveiling his first Monetary Policy, claimed that the policy will help mitigate the economic effects of Covid-19 and help support businesses get back on their feet.
Though the budget failed to bring any rescue package to the economy, the private sector has been pinning its hope in Monetary Policy to kick start the stalled economic activities. However, the please-all policy has something for everyone and diverted from its main objectives. The Nepal Rastra Bank (NRB) – central bank of the country – brings Monetary Policy every year with three objectives – apart from supporting the fiscal policy – to contain inflation, maintain financial stability and money supply. But the provisions – in the policy for the current fiscal year – like deferring the loan and interest payment by up to two years is going to hurt the financial stability, whereas the excessive money supply to push economic growth rate to achieve 7 per cent target will create inflationary pressure. The Monetary Policy – following the fiscal policy – has claimed to contain the inflation under 7 per cent but the central bank has repeatedly failed to contain inflation in last couple of years. The domestic market has created up to seven layers, which has pushed the prices of the goods to unnatural high and is beyond the control of any monetary instruments.
Likewise, the decreasing interest rates on deposits will not only encourage capital flight from the country – creating another round of liquidity crunch in the financial system – but also the common people will not be encouraged to deposit in the banks and financial institutions (BFIs), though the private sector will find ‘cheap money ‘ to borrow. The cheap money will increase the risk of money going out of the banking channel and fuelling the informal economy.
According to the policy, facilities of bankers will also be reviewed while allowances are to be discouraged. The central bank has been keeping an eye on chief executive officers’ perks since long. The policy that has signaled to cap the chief executives salary and perks is against the free and competitive market norms, and encourage rent seeking mentality among the bankers rather than being competitive, which will definitely increase risk in the BFIs.
The policy has however, announces loads of packages for the economic revival through refinance. Though, the policy is mum on the size of the refinance package, the budget had announced to create Rs 100 billion refinance fund, apart from Rs 50 billion refinance fund for tourism and micro, small and medium enterprises that will provide loans at a 5 per cent interest rate for reviving the enterprises and paying staff salary.
Likewise, the Monetary Policy has – apart from relief and revival of various sectors affected by the coronavirus – also extended loan repayment deadline, provided refinance facility, extended grace period for infrastructure projects and targeted lending in productive sectors at cheaper rate. It has also encouraged mandatory lending to agriculture, micro, small and medium enterprises (SMEs) and energy sectors. According to the new provision, the commercial banks – by mid-July 2023 – will now require to invest 15 per cent of their total loan portfolio in the agriculture sector, some 15 per cent to micro, small and medium enterprises (SMEs); and 10 per cent to the hydropower sector by mid-July 2024. Likewise, the banks will be allowed to issue energy bond refinancing loan facility for SMEs at 2 per cent.
Currently, they need to extend 10 per cent loans to agriculture, 15 per cent to energy and tourism sectors but both targets have not been met so far, according to the central bank that has also opened the door for banks to issue energy and agriculture bonds which can also have investment from farmers and hydropower developers.
As part of providing relief, the Monetary Policy has also extended the deadline for paying loan instalments by six months, nine months, one year and two years, depending on the degree of impact on the particular sector as the central bank seeks to ease the pains on the businesses caused by the pandemic.
The previous installment and interest payment period of loans as of mid-July has now been extended till mid-December, while moratorium on loan, interest rate recovery has been extended till mid-December, Adhikari said, adding that the Monetary Policy promotes merger among BFIs. But the policy has, as expected, did not announce forced mergers, though it has offered some olive branches for those, who wants to go for merger or acquisitions. (M&A). The policy has announced to allow merged entities to collect 10 per cent more corporate deposits than the fixed cap. Likewise, the cooling period will not be applicable for promoters and chief executive officers of the merged entities.
Likewise, the Monetary Policy has revised credit to core-capital-cum-deposit (CCD) ratio for banks upwards to 85 per cent from existing 80 per cent to allow BFIs to enhance their lending capacity, though the change will not release any considerable amount. The increase in CCD – that is also considers the anchor of domestic financial sector stability – ratio limits until which the banks are allowed to issue the loans and advances. “The increase in CCD ratio by 5 percent is expected to release an extra Rs 183.3 billion in loans, considering total deposit of Rs 3,666.6 billion in the banking sector but it is not possible.
In a bid to help revive businesses hit hard by the coronavirus, the central bank has also made it mandatory for banks to disburse subsidised loans, which are available at five per cent. While commercial banks are required to disburse such loans to at least 500 borrowers or at least 10 such loans per bank branch, development banks have been compelled to float subsidised loans to at least 300 borrowers or at least to five borrowers per bank branch, whichever is more.
The policy has, however, halted issuance of new licences to finance companies while it has also capped interest rate on loans issued by such companies to 15 per cent or less.
Likewise, the BFIs are barred from charging excessive service fee. “While commercial banks can now take only 0.75 per cent service charge while issuing loans, development banks and finance companies can take only one per cent and 1.25 per cent service charge from borrowers, respectively,” the policy reads, adding that it has also barred the BFIs from charging fees on interbank ATM withdrawal – which the Nepal Bankers’ Association (NBA), Development Banks’ Association Nepal (DBAN) and Nepal Finance Institutions Association (NFIA) had officially decided to charge from July 16 – till Covid-19 crisis is over.
The policy has also announced to halt issuing licence to new digital payment service providers and scrap the licence of those service providers failing to expand their consumer base to 300,000 by mid-July next year and those that fail to conduct monthly transactions worth Rs 600,000 on an average.
The private sector, however, welcomed the measures in the policy. “Our demand was ‘3R’ – Reduce, Refinance and Restructure the loans – that the policy has largely addressed,” the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) said, adding that the policy has addressed most of its demands vis-a-vis rescue and revival of the businesses in the wake of Covid-19. “It has also introduced a policy to take care of small and medium enterprises, which have been badly affected by the pandemic.”
Likewise, has the primary opposition Nepali Congress has critically welcomed the policy that has permitted BFIs to extend further loans to industries and businesses affected badly by the pandemic by 20 per cent of the working capital maintained at mid-April. “Likewise, exports and sick industries as well as other sectors will get special refinancing facilities at a maximum 3 per cent interest rate, while micro, cottage and small industries will get credit at a maximum 5 per cent interest rate,” the policy reads, adding that

Major Highlights
Additional relaxations like CRR requirement flexibility and facilities for bank and financial institutions that pursue merger and acquisition.
Provisions will be made for merger and acquisition of those institutions with cross-holding.
Loan repayment holiday for borrowers will be extended based on the severity of the impact. Those hit hardest will have time to repay their loans
20 per cent loans from refinance funds to be floated directly from Nepal Rastra Bank, 70 per cent from commercial banks and 10 per cent from other institutions including microfinance.
Working Capital loans, refinance fund facility and subsidised loans will be prioritised for aviation, transportation, tourism and other sectors hit hardest by Covid-19.
Provision will be made to allow banks to issue Energy Bonds.
Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR) requirements for commercial banks unchanged.
Guidelines on bank CEO's salary and board director's allowance will be reviewed and revised.
No interbank ATM withdrawal charges.

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