Saturday, 24 February, 2024

Monetary Policy For Economic Revival

Uttam Maharjan


Nepal Rastra Bank (NRB) has unveiled the monetary policy for the fiscal year 2077/78. The monetary policy has come out at a time when the whole country is going through a bad patch due to the COVID-19 pandemic. Due to the lockdown enforced to curb the spread of the novel coronavirus, almost every sector of the economy has suffered a lot. Although the lockdown has been relaxed, various sectors like business, industry, hospitality, tourism, transportation and education are still stuck in the mud. All the sectors badly hit by the COVID-19 pandemic were expecting relief from the government through the monetary policy. And the monetary policy has addressed most of the woes of such sectors.

In fact, the recently unveiled monetary policy aims at reviving the sagging economy by helping out economic players like banks and financial institutions (BFIs), industries and businesses and even the general public hit hard by the COVID-19 pandemic. So the monetary policy may be considered a departure from its predecessors.
NRB has, through the monetary policy, extended the tenure of loan repayment by six months to one year on the basis of types of businesses and the financial condition of loan clients. The tenure may be further extended in case the situation worsens. NRB has also allowed restructuring or rescheduling of loans so as to give relief to loan clients. If such restructuring or rescheduling proves to be inadequate, financial instruments like private equity, venture capital, debt equity conversion and special purpose vehicle may be adopted to give respite to suffering businesses. The monetary policy aims at developing the stock market. For this, NRB has raised the ceiling of margin lending from 65 per cent to 70 per cent of the share value. This will enable people to invest more in the stock market. The stock market is part of the financial market.
NRB has made it mandatory for banks to invest 15 per cent of the total loan portfolio in agriculture, 10 per cent in hydropower and 15 per cent in micro, cottage and small industries by the end of Asadh of 2081 as against 10 per cent in agriculture and 15 per cent in energy and tourism as per the previous provision. The new provision is designed to give a fillip to agriculture, hydropower and other sectors. However, the monetary policy is silent on employing migrant workers who have returned from abroad in such sectors.
NRB has made a provision that will enable BFIs to refinance five times the money held in the refinancing fund. A refinancing facility has been made available to BFIs at one per cent for export-oriented industries, sick industries and other defined industries; at two per cent for micro, cottage and small industries; and at three per cent for defined industries. It is good news for borrowers that they can avail themselves of loans at lower interest under the scheme, ranging from three to five per cent. The provision for refinancing is a great relief for the businesses hit hard by the COVID-19 crisis.
The policy has also brought relief for banks. Banks have been lobbying for a long time that the credit to core capital-cum-deposit (CCD) ratio be revised so as to make space for more lending. This time, NRB has raised the cap on the CCD ratio to 85 per cent from 80 per cent. This will release an additional Rs. 120 billion in the market for lending. There is a liquidity of Rs. 166 billion in the market now. Although banks have not been able to invest in lending in comparison to the mobilisation of deposits, this situation is expected to come to an end after the abnormal situation due to the COVID-19 pandemic has limped back to normal. Although the statutory liquidity ratio (SLR) has been slashed by one per cent, the interest spread rate has not been revised as expected by banks. The cash reserve ratio (CRR) has also remained unchanged.
The monetary policy has presented a challenge to banks to expand credit by 20 per cent. For this, an additional Rs. 900 billion needs to be injected into the banking sector. An increment in the CCD ratio by 5 per cent and the available liquidity may be of some help in this regard. Still, it will be arduous for banks to mobilise this much amount.
NRB has raised the issue of salaries and fringe benefits of CEOs and other high-ranking officials. The salary of a CEO is so high that it may be even ninety or hundred times the salary of the lowest-level staff. This is simply against social justice. One of the arguments is that the salary of a CEO must be very high because he or she is appointed on contract. But this argument is simply lame. Other staff appointed on contract do not get a very high salary. NRB raised this issue over a decade ago but nothing has been done in this regard. Now, NRB has stated that the salary and fringe benefits of CEOs will be reviewed and BOD allowances will also be scrutinized as a cost-cutting measure, which is a welcome step.

Mergers and acquisition
NRB has encouraged mergers in the banking sector. The banks opting for a merger will get a waiver of 0.5 per cent on the CRR and one per cent on the SLR as well as other facilities. The issue of mergers and acquisition has been in the market for a long time. Many BFIs have also merged, reducing the number of financial players. Still, the number of commercial banks has not remarkably decreased as expected. So NRB is trying to further reduce the number of commercial banks through mergers and acquisition.
In a nutshell, the monetary policy is positive as it aims at giving relief to the COVID-19-affected sectors, creating a business- and investment-friendly environment, setting in motion economic activity and resurrecting the stagnant economy as a whole. That is why the monetary policy has been welcomed by almost all the sectors.

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