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.

Central bank intervenes after banks raise interest rates on savings

 Though its wrong principally to interfere in the free market, the central bank has interfered in the banks and financial institutions asking them to return the interest rate imposed on savings from October 18.

Claiming that the banks have increased the interest rates arbitrarily to attract deposits from other financial institutions Nepal Rastra Bank (NRB) has issued a three-point directive tonight. Most of the banks and financial institutions (BFIs) termed the central bank's move as a 'micromanagement' in the financial market.

According to the free market principle, the central bank cannot interfere in the interest rates of the BFIs. "But some banks have created fake deposits and others have tried to lure the deposits by offering higher interest rate, which is going to hit the economy," a central bank official claimed, adding that the banks have given no space but to intervene in the interest rate due to their cut throat competition to literally 'snatch' deposit. "The central bank wishes the interest rate to remain in the single digit."

But according to the banks, they are facing lonable fund crunch also due to central bank's policy to scrap credit to core capital plus deposit ratio (CCD) and implement credit-deposit ratio (CD) -- through the Monetary Policy 2021-22 -- which means banks can lend Rs 90, only if they have Rs 100 deposit. 

Most of the banks increased interest rates on savings and term deposits with effect from October 18 as is the practise of announcing the interest rate on the monthly basis, under the regulatory compliance. Some banks offered more than 11 per cent interest rates -- on personal and institutional deposits -- which is more than 30 per cent increment from the interest rate a month ago.

According to the directive, banks and financial institutions can change -- upward or downward -- the interest rate of any type of deposit by only 10 per cent of the previous month’s interest rate.

Likewise, the interest rate on institutional term deposits (including bidding) should be at least one per cent lower than the maximum interest rate on term savings to the public, the directives reads, asking the banks and financial Institutions to republish the new interest rate on its website by Wednesday and in national daily newspapers within Friday.

One banker said that the central bank has always been micro-managing the banks and financial institutions, and the current directive is only a step forward.

NRB injects additional Rs 20 billion in the financial market

As the financial system is drained out of cash, the central bank today injected an additional Rs 20 billion in the system to ease a growing loanable fund crunch.

The central bank issued a repo worth Rs 20 billion amount through the bidding process for the next two weeks. Last week too, the central bank had injected Rs 30 billion through the monetary instrument.

The banking system is currently under pressure to manage loanable fund. The banks attribute the crunch of loanable fund crunch to the central bank's new rule of credit-deposit (CD) ratio implemented through monetary policy. Through the monetary policy, Nepal Rastra Bank (NRB) has implemented the CD ration with a ceiling from 90 per cent from earlier limit of 85 per cent, but scraped the provision of credit to core-capital plus deposit (CCD) ratio, which had given a room to the financial institutions to lend.

Bankers, however, are of the view that the change in policy has tightened the liquidity from the financial system, through the central bank disagree.

According to bankers, banks now have only Rs 25 billion in loanable funds. The banks have also started increasing interest rates to attract the deposit. The loanable fund crunch has also increased interbank transactions pushing the interbank rate to over 5 per cent from below one per cent in the past few months.