Friday, November 26, 2021

Monetary Policy quarterly review gives continuity to CD ratio provision

The central bank has stressed on policy stability in the first quarterly review of the Monetary Policy 2021-22.

Releasing the review report today, the central bank has kept the cash reserve ratio (CRR), statutory liquidity ration (SLR) and widely critisised 90 per cent cap on credit to deposit (CD) ratio unchanged. The CD ratio has been blamed for current credit crunch. The bankers were asking the central bank and finance minister to revert to the earlier system of CCD ratio. The central bank, through Monetary Policy for the current fiscal year 2021-22, has scrapped the provision of credit to core capital plus deposit (CCD) ratio and mandated CD ration to be kept at 90 per cent. Most of the commercial banks have CD ratio over 90 per cent, restricting them to further lend. But the review has asked the banks to prepare a plan to contain CD ratio within 90 per cent by the end of this fiscal year, and submit it to the central bank.

Nepal Rastra Bank (NRB) has, however, tried to tighten the imports, which has seen whopping growth since last couple of months as the Covid-19 infection has been weak. The alarmingly rising imports has eaten up the foreign exchange (Forex) reserve as it has been depleting fast since last couple of months.

In a bid to address the declining forex reserves, the central bank has adopted different measures to discourage imports like making cash margin mandatory when opening LC, limit import of silver and simplify the process of bringing in deposits from Non Resident Nepalis (NRNs), reads the review.

Likewise, the central bank has also introduced a provision whereby commercial banks can issue collateral for loans in foreign currency for commercial agriculture, manufacturing industries, tourism and projects.

Projecting the pressure on external sector stability to continue, as the demand for credit is increasing due to economic recovery process and a large portion of such credit is being spent on import payments at a time when remittance inflow is also not decreasing, the central bank has tried to stop the forex reserve depletion.

Despite a huge pressure to lift cap from margin-type lending, the central bank has not reviewed 40 million and 12 million cap. The fall in share market has been attributed to the central bank's policy to put cap of Rs 40 million (for one financial institution) and Rs 12 million (from the overall financial system) in margin type lending. The provision was also brought in the Monetary Policy for the current fiscal year 2021-22. The share investors have been asking the central bank to revert the decision. However, the central bank, in the review, said that the provision will help financial sector stability and is necessary as the margin type loan has been projected to create bubble in stock market.

Likewise, the central bank has also projected that expenditure on local elections in the current fiscal year will further expand the demand for credit and put pressure on prices. It has also projected the economy to recover wisely citing that the impact of Covid-19 has been gradually diminishing, the availability of vaccines has increased, the number of people going for foreign employment has started increasing, foreign tourist arrivals have increased and that the export of electricity has started.

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