Major highlights of Monetary Policy 2007-08

• The monetary policy for the fiscal year 2007-08 that Nepal Rastra Bank (NRB) made public on 23 July has no remarkable policy changes.
• It focuses mainly on managing high liquidity and maintaining fiscal stability, vowed to limit the inflation rate at 5.5 per cent and achieve surplus balance of payment of at least eight billion rupees.
• In order to bolster institutional investments to the disadvantageous sectors, the policy has raised single borrower limit for microfinance institutions to Rs 60,000 for individuals and Rs 150,000 for micro enterprises.
• Microfinance institutions that raise their paid-up capital by Rs 2.5 million, will be allowed to extend services to one adjoined district, the policy stated.
• Now onwards commercial banks are required to extend three per cent of their total loan investments for deprived sector. The policy has been extended to development banks and finance companies as well.
• There will be no need of 20 per cent additional loan loss provision on the loans extended to the deprived sector, according to the policy.
• To boost investment in major infrastructure projects, the policy has raised the existing single borrowing limit to 25 per cent of the primary capital while extending loans to sectors that require huge investments like hydropower.
• The policy has announced to slash export refinance on Nepali currency by one percentage point to 2.5 per cent but a cap on lending interest rate of five per cent has been set for commercial banks extending such loans.
• The central bank has also announced to extend concessionary refinance at 2.5 per cent to support the revival of cottage and small scale industries, but the retail interest rate of such loans should be less than 5.5 per cent.
• NRB continued the policy of extending loans to sick industries at a concessionary rate of 1.5 per cent. However, the policy has made it clear that commercial banks dealing with such loans are not allowed to charge an interest rate if more than 4.5 per cent.
• In order to check possible misuse of short-term loans being provided to development banks and finance companies by commercial banks, the NRB has raised penal interest on such loans.
• The monetary policy has also lowered the service charge that the commercial banks have to pay to the central bank while exchanging foreign currency to one per cent from two per cent.
• The rate of commission that banks charge to the customer while buying convertible currencies will come down by the same level.
• The policy estimates that the board money supply (M1) will remain at 15.6 per cent against the estimated 15 per cent recorded last year.
• Internal loan is expected to grow by 17.1 per cent and the total loan investment from banking sector to private sector is likely to increase by 18.5 per cent during the current fiscal year.
• Like in the past, the bank has taken more steps to liberalise the foreign exchange (forex) regime. The policy has added a new mechanism making imports possible using documents against payment in addition to the existing letter of credit (LoC) or draft/TT facilities.
• Traders can import raw materials and intermediate products from India against payment of US dollar.
• The ongoing financial reform programmes will continue.
• The policy has also warned the stock market that the current bullish trend defies the market fundamentals.