Wednesday, 28 September, 2022

Dissection Of Monetary Policy

Dissection Of Monetary Policy

Uttam Maharjan

The government unveiled the monetary policy for the fiscal year 2078/079 on August 13, 2021. This time, the monetary policy came a bit late for political reasons, or rather political instability. The budget for this fiscal year was unveiled by the erstwhile government on May 29, 2021. There is a practice of unveiling the monetary policy on the heels of the announcement of an annual budget to implement the provisions relating to financial aspects mentioned in the budget.

As in the previous year, the monetary policy has come out amid the raging COVID-19 pandemic. The major concern of the country is how to get out of the clutches of the pandemic and how to improve the economy battered by the pandemic. So the monetary policy has focused on reviving the economy.

Financial sector

It is a no-brainer that banks and financial institutions (BFIs) are the backbone of the economy of the country. When the financial sector is weakened, it will adversely affect the economy. However, as compared to other sectors, the financial sector has maintained its sound foothold. The BFIs have suffered a profit crunch to some extent but they are still making a profit, distributing bonus to their employees, dividend to their shareholders and paying tax to the government, thus strengthening the government coffers.

In recognition of the contributions of the BFIs to the economy, the government has also provided them with some facilities in view of the impact of the COVID-19 pandemic on them.

The monetary policy has given continuity to the refinancing facilities to help reduce the impact of the pandemic on industries and enterprises. This provision was introduced during the last fiscal year.

In order to improve the liquidity situation, the monetary policy has jacked up the credit-deposit ratio to 90 per cent from the previous 85 per cent. With this revision, the BFIs will have an excess of 5 per cent liquidity, which can be invested in lending. An increased credit flow resulting from this will also incentivise the business sector to expand business prospects. Similarly, the credit to core capital plus deposit (CCD) ratio, which was set at 85 per cent last fiscal year from 80 per cent from the year before, has been rescinded for this fiscal year, giving relief to the BFIs.

The monetary policy has encouraged the mergers and acquisitions of the BFIs. The policy of the successive governments towards reducing the number of commercial banks through the process of mergers and acquisitions has not panned out satisfactorily. To motivate the BFIS to go through the process of mergers and acquisitions, the monetary policy has some facilities in place.

There is a provision of reducing the cash reserve ratio (CRR) by 0.5 per cent for a year after commencement of joint operation, of lowering the statutory liquidity ratio (SLR) by one per cent for one year after commencement of joint operation, annulling the dormant period (cooling-off period) of six months for board members and top executives before joining other institutions and of extending one per cent leniency in the interest spread rate, among others.

The monetary policy has, however, tightened its noose around big share-market players by putting restrictions on margin lending. Now, a person or entity can avail of a margin loan of Rs. 40 million from a single financial institution and of Rs. 120 million in total. This provision will not affect small share-market players. It is believed that big share-market players can manipulate the share market. Now, the share market is continuing its bullish trend with a NEPSE index of over 3,000.

Remittances are a good source of financial support for the country. Many Nepali migrant workers are scattered across the world, especially across Gulf countries, in the course of foreign employment. It is said that still more remittances are coming to the country through the non-banking channels.

To encourage the migrant workers to send remittance money back home through the banking channels, the monetary policy has made a provision of giving an additional one per cent interest to remittance deposits. This provision is expected to encourage them to send money through the banking channels and increase deposits (savings) in the BFIs.

Loan rescheduled

The monetary policy has also paid heed to other sectors hit by the COVID-19 pandemic. The monetary policy has made a provision whereby the loans taken by tourism entrepreneurs, cinema halls, public transport entrepreneurs and educational institutions – the sectors hardest hit by the pandemic - may be assessed and rescheduled or restructured by the BFIs concerned by Poush-end.

Likewise, the tenure of the loans taken by hotels, restaurants, cinema halls and public transport entrepreneurs may be extended to another one year and the loans may be repaid, along with interest, in four instalments. This is a positive aspect of the monetary policy.

In fact, post-pandemic recovery is the main concern of the government. The COVID-19 pandemic is still raging and many sectors are still in a shambles. In such a grim situation, it is but natural for such sectors to look to the government for financial succour and facilities to free themselves from the impact of the pandemic.

The recently announced monetary policy has paid attention to reviving the industries and enterprises hit hard by the pandemic. Viewed thus, the monetary policy can be considered the one in the right direction in the present-day context. What is needed is the implementation of the provisions enshrined in the monetary policy for the revival of the economy badly hit by the pandemic.

(Former banker, Maharjan has been regularly writing on contemporary issues for this daily since 2000.