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.

Central bank aims at easing loanable fund crunch through Monetary Policy

With focus on addressing loanable funds crunch and credit growth in priority sector, the central bank has brought Monetary Policy for the fiscal year 2019-20, using all the possible monetary instruments.
Released by central bank governor Dr Chiranjibi Nepal today, the Monetary Policy includes a slew of measures to ease the existing shortage of loanable funds at banks and financial institutions (BFIs), lower interest rates and borrowing costs for private sector, though the private sector doubts the implementation of the policy and reduction of interest rates.
Through the Monetary Policy, the Nepal Rastra Bank (NRB) has lowered the general refinance rate to three per cent from current four per cent as part of the efforts to make loans cheaper for priority sectors. “With the general refinance funds to BFIs at 4 per cent, borrowers in priority sectors like manufacturing, tourism and energy will not be charged more than 7 per cent interest rate,” the governor said, adding that the central bank has but barred BFIs from levying more than 7 per cent interest rate to SMEs borrowers for such loans, compared to 10 per cent being levied at present.
The central bank – to address the liquidity issue – has also said that it will introduce provision to allow commercial banks to borrow in convertible currency from foreign institutions, including pension funds and hedge funds. The central bank has also allowed BFIs to collect fixed deposits in foreign currency from organisational foreign depositors and Non-Resident Nepalis (NRNs). However, such deposits should have maturity period of at least two years, and BFIs can disburse cent per cent of such deposits as loans in Nepali currency, the Monetary Policy reads, adding that the move of widening of the sources for external borrowings by the BFIs is expected to ease the crunch of loanble fund. “The new measures will also help lower interest rates apart from addressing the shortage of loanable funds.”
The Monetary Policy has reduced the refinance rate, tightened calculation of the interest rates spread formula – according to the Financial Sector Development Strategy (2016-17 to 2020-21) that envisions bringing the spread rate down to 4.4 per cent by fiscal year 2020-21 – and lowered the bank rate to help make borrowing cheaper, though the private sector is not very much excited about the reduction of interest rates as the central bank move will , according to them, not help reduce the interest rate.
The central bank has also barred BFIs from adding more than two per cent interest premium on their base rate while fixing the lending rate on loans up to Rs 1.5 million disbursed in agriculture, entrepreneurship and business promotion sectors. Moreover, the central bank has barred BFIs from taking any type of service charge from borrowers on such loans. More importantly, the central bank has also made it mandatory for BFIs to approve such loan demand within seven days of the submission of application from borrowers. The BFIs have now been barred from charging additional fees from customers while making transactions through Point of Sales (PoS) machines.
“The measures prescribed by the Monetary Policy is not adequate for making borrowing easier and cheaper,” the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), said, adding that managing liquidity more efficiently and maintaining interest rate stability is key to private sector borrowing that can fuel economic growth.
The Monetary Policy has also made it mandatory for the commercial banks to float debentures, corporate bonds equivalent to 25 per cent of their paid-up capital by the end of fiscal year. The central bank – through the Monetary Policy – also claimed to introduce necessary mechanism to ensure the funds raised through corporate bonds will be used to disburse loans. The move, according to the central bank, is expected to diversify the source of liquidity for banks that rely largely on deposits to disburse loans. “The requirement of debentures, which tend to be of long-term nature will help address the loanable funds shortage,” the central bank adds. The mismatch in the assets and liabilities – as banks used to provide long-term loans from short-term deposits – has been blamed for shortage of loanable fund currently, leading banks to engage in an interest rate war that has fuelled interest rates.
Thus, the Monetary Policy has also tightened the spread rate and effectively implementing the interest rate corridor to address the problem of interest rate volatility.
Similarly, the central bank has projected that money supply growth to be limited to 18 per cent and private sector credit growth to 21 per cent in the current fiscal year. In the last fiscal year 2018-19, the central bank had projected 20 per cent private sector credit growth. “The Monetary Policy has also projected domestic credit growth at 24 per cent for the current fiscal year – against 22.5 per cent estimated in the last fiscal year – to achieve government’s ambitious growth target of 8.5 per cent for the fiscal year 2019-20,” the policy reads.
Speaking at the launching central bank governor Dr Chiranjibi Nepal said the expansion of credit to both government and the private sector could boost the availability of funds to invest in productive sectors. “The government will need to invest Rs 450 billion while the private sector needs to inject Rs 1.25 trillion in order to achieve the government’s targeted economic growth of 8.5 per cent,” he said, adding that the policy has made it mandatory for micro-finance firms to disburse one-third of their total loan in the agriculture sector to raise credit flow in the agriculture industry. “The NRB will fix the upper limit of Debt Service to Gross Income ratio in non-business loans including individual loans, home loans and hire-purchase loans being issued by BFIs.”
The NRB has also made PAN mandatory for seeking loans of above Rs 5 million from BFIs, from current above Rs 10 million, the policy reads, adding that the central bank is also introducing policies to facilitate citizens to keep gold in banks as deposits.
Similarly, the Monetary Policy 2019-20 has – in line with fiscal policy – targeted keeping inflation within six per cent and maintaining foreign exchange reserve (forex reserve) to sustain the prospective import of goods and services for seven months.
This time, however, the central bank has not revised the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) for BFIs, though they are also key monetary tools to ease the banks’ liquidity position, though the bankers have suggested the central bank to revise the CRR downwards. Likewise, the policy is also silent when it comes to revising the threshold in the credit to core capital-cum-deposit (CCD) ratio, which bankers have been pressuring the central bank to address through the monetary policy.
Currently, the CCD ratio imposed for banks and financial institutions stands at 80 per cent, which means a bank cannot extend more than 80 per cent of its deposit and core capital as loans.

Highlights:
• Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR) left unchanged
• Average annual inflation to be contained at 6 percent
• Banks required to issue debentures equivalent to 25 per cent of paid-up capital
• Policy to be made for BFIs to open branches abroad
• Maximum limit for debt service to gross income ratio to be fixed for home loans, hire purchase
• Policy to be made for foreign currency payments for social media ads
• BFIs barred from selling bankassurance
• Gold can be parked in banks as deposits

Development banks seek flexibility in lending limit

Aiming to ease the shortage of lendable fund in the banking system and also encouraging them to increase loans to the agriculture sector, Development Bankers Association Nepal (DBAN) has urged the central bank to allow the 'B' class financial institutions to deduct loans floated to agriculture sector in excess to the regulatory requirement in the credit to core capital plus deposit (CCD) ratio.
The CCD ratio is a prudential lending limit enforced by the central bank, restricting bank and financial institutions (BFIs) to lend more than 80 per cent of their combined capital and deposits.
The association submitting an 11-point suggestion to the Nepal Rastra Bank (NRB) – to address their problems through the monetary policy for next fiscal Year 2019-20 – also sought a relaxation in the way the CCD ratio is calculated. According to the suggestion of the association, agro loans exceeding the regulatory requirement should be allowed to deduct in the CCD ratio.
The development banks can disburse new loans equivalent to agro loans without mobilising new deposits even, if they are close to breaching their lending limit, if the measure is introduced, said development banks that are currently required to float at least 10 per cent of their loans in priority sector including agriculture.
“It will encourage development banks to help meet the government's target by increasing investment and lending in the agriculture sector,” reads the recommendations submitted to the central bank last week by the association that has also sought flexibility in deducting loans directly floated to deprived sector exceeding the CCD requirement, as well as the investment higher than the requirement in the cash reserve ratio (CRR) and statutory liquidity ratio (SLR).
The association has also recommended the central bank to increase the limit and maturity period of the refinance fund to ease the liquidity crunch and offer a respite to productive sector which has been facing shortage of loans.
The association has asked the central bank to increase the limit and maturity period of the refinance fund. The central bank currently provides refinance facility for up to six months.

WB identifies 5 key risks for Nepal’s economic outlook

The World Bank has pointed out five major risks to the economic outlook of Nepal including reform implementation constraints and vulnerability to natural disasters.
Releasing a new report for its regional economic update today, the World Bank said that the economic growth of Nepal is projected to grow by 6 per cent in the current fiscal year 2018-19.
While saying that the growth is likely to be strong in the mid-term, the periodic report has also highlighted five key risks for the outlook. These risks include slow implementation of reforms to increase private investment, especially foreign investment, limited resources and capacity to support federalism and local service delivery, and constraints on credit as banks limit lending to meet the credit to core capital plus deposit (CCD) ratio regulatory limit, according to the report.
Similarly, other risks to the growth identified in the report are adverse effects of natural disasters and shocks to remittance inflow. “The poverty outlook is especially sensitive to remittance inflows, natural disasters and local level implementation capacity constraints that may hamper service delivery,” reads the report.
Against the backdrop of implementation of federalism, the report has also found the capacity to sustain service delivery and establish fiscal discipline, particularly at the local levels, a major challenge to the growth prospect.
“The transfer of financial management staff over a year ago made it possible for local governments to prepare budgets and receive fiscal transfers of 8 per cent of GDP in fiscal year 2018-19," The report further stated adding that under-spending of the budget however persists.
The report’s growth forecast of 6 per cent in the current fiscal year is, however, lower than the recent Asian Development Bank (ADB) projection of 6.5 per cent, International Monetary Fund (IMF) 6.5 per cent and the government’s own target of 8 per cent.
“In Nepal, GDP growth is projected to average 6 per cent over the medium term," the report reads, adding that the services sector is forecast to benefit from strong tourism, and manufacturing will be supported by the opening of Nepal’s largest cement factory next year. "We anticipate the ‘strong’ growth to continue to drive significant poverty reduction."
Nepal is bracing for over 6 percent growth for the third consecutive year. In the fiscal year 2017-18, the growth is estimated to reach 6.3 per cent, compared to 7.9 per cent in the previous fiscal year.
Meanwhile, the report, which has focused this time on how South Asia can boost its exports to maintain growth, also calls for increasing the region’s exports to sustain its high growth and reach its full economic potential.
“South Asia’s exports performance has dropped in the last few years to languish at far below its potential and while growth still looks robust, we are concerned about whether this can hold up over the longer term,” a press statement issued after the release of the report quoted World Bank vice president for the South Asia Region Hartwig Schafer, as saying. “To ensure growth in the long run, the region needs to integrate further into international markets to sustain its upward growth trajectory, create more jobs, and boost prosperity for its people," the twice-a-year regional economic update states.

CNI urges central bank to hike CCD ratio, lower CRR

Against the International Monetary Fund (IMF) Article IV mission's prescription of not changing the CCD ratio, the Confederation of Nepalese Industries (CNI) has called on the central bank to increase credit to core capital-cum-deposit (CCD) ratio to 85 per cent until the time banks and financial institutions create adequate stock of loanable funds.
The IMF has said that hiking the CCD ratio – as asked by the bankers – will encourage financial indiscipline. Currently, the banks and financial institutions have to maintain CCD ratio at 80:20 meaning of every Rs 100 deposit they collect, they can only lend up to Rs 80.
The CNI has, however, asked the central bank to increase the CCD ratio to 85:15 from current 80:20.
"With deposit flow remaining comparatively lower, CCD ratio of some of the banks has exceeded 80 percent mark," according to the central bank data.
The body of manufacturing and services enterprises has also urged the central bank to reduce cash reserve ratio (CRR) for banks and financial institutions by a percentage point for the time being to enable them to extend loans.
Currently, commercial banks have to maintain CRR-portion of total deposit that needs to be parked at the central bank of 6 per cent, while development banks and finance companies have to maintain CRR of 5 per cent and 4 per cent, respectively.
Lately, some banks and financial institutions are facing severe shortage of funds that could be immediately extended as loans. Though, they are claiming of liquidity crunch, it is more of a credit crunch as they have almost no loanable funds at present.
Banks have collected fresh deposits of Rs 154 billion since the beginning of the current fiscal year from mid-July till January 13, according to the latest data of the Nepal Bankers’ Association (NBA). "But the credit flow stood at Rs 204 billion in the same period."
This mismatch in deposit collection and credit disbursement is the major reason for shortage of loanable funds.
Their aggressive lending on unproductive sectors – as the central bank claims – has sqeezed their lending capacity.
Saying that the current liquidity crunch has increased lending rates in the financial sector, the CNI said that higher lending rates will hit the economic growth.