So, the Governor of the Nepal Rastra Bank (NRB), Maha Prasad Adhikari finally released the much anticipated monetary policy for the ongoing fiscal year i.e. for the fiscal year 2081/81 (2024/25)! FYI, it was supposed to be released last week but there were many things in play. A change in the Government, appointment of a new financial advisor to the Prime Minister and lack of sufficient discussion for alignment of policies between the authorities, primarily the central bank and the finance ministry, were some of the alleged reasons. 

Now, you may be wondering why monetary policy has so much significance, right? After all, most of the things are covered in the budget speech of the Government. And many of us may be assuming that monetary policy has got more to do with banks and financial institutions and not with the common people like us. 

If you are wondering how monetary policy affects you, then maybe you should read our earlier article where we described “monetary policy” as the steering wheel of a country's economy, controlled by the central bank. Yes, so you can say that the Nepal Rastra Bank is the driver of Nepal’s economy. You may then ask: What is the Nepal Government or more specifically the Ministry of Finance? What do you think it is? 

Well, let’s not argue over who is who and focus our discussion on the main agenda i.e. what’s there in the monetary policy this time. The new monetary policy has been termed “flexible” and looks “aligned” to Prime Minister KP Oli’s call for a flexible monetary policy, during the vote of confidence at the Parliament. After many years, things are certainly seem to be moving in a sync with the appointment of Mr. Bishnu Prasad Paudel as the Finance Minister. 

The stock market is gaining new grounds and there are signs of economic recovery. The formation of the new government has certainly provided a positive boost in the stock market. Now a flexible monetary policy has been framed to reaffirm the Government’s commitment to strengthening other sectors of the economy.

Let’s discuss the key highlights of the monetary policy: 

1. Ensure Liquidity and Loan Disbursement to Meet Economic Growth Target: 

The Nepal Government has set an economic growth rate target of 6% for this fiscal and the monetary policy is aligned to ensure that there will be enough liquidity and loan disbursement to the private sector to meet the growth target.  

1. Tame Inflation at 5%:

This target helps ensure that the economy remains stable by preventing excessive inflation.

1. Extension of Loan Interest Repayment Period for Construction Businesses:

The deadline for repaying the interest on loans for construction businesses has been extended until the end of Mangsir 2081.This extension is intended to provide additional time for construction businesses to manage their financial obligations and improve their economic stability. Most construction businesses have not been able to meet their obligation due to non-payment of their dues by the Government. 

1. Removal of Share Collateral Loan Cap for Institutional Investors:

NRB has lifted the Rs. 20 crore limit on share collateral loans for institutional investors. This change aims to enhance investment flexibility and boost the stock market, benefiting the broader economy. Individual investors will continue to have the cap of Rs. 15 core in place.

1. Reduced Provisioning Requirement for Banks:

Provisioning for good loans has been reduced from 1.20% to 1.10%. This move is expected to improve bank profitability.

1. Credit Expansion

The Monetary Policy has increased the target for credit expansion to 12.5 percent for the current fiscal year. That target was 11.5 percent in the previous year.

1. Lower Policy Rates

NRB has lowered the policy rates from 5.5 percent to 5 percent, and the upper limit of the interest rate corridor has been set at 6.5 percent from the earlier seven percent, while the lower limit remains the same at 3 percent.

1. Key Focus on the Microfinance Sector: 

The central bank says the merger and acquisition of microfinance financial institutions is one of its focus areas. To address the current issues in the microfinance sector, NRB is committed to a review of the regulatory framework concerning interest rates and service charges imposed by microfinance institutions. Currently, microfinance is allowed to charge a maximum interest rate of 15 percent on loans. The policy also talks about making provisions to enable microfinance customers, who are unable to repay loans due to unforeseen circumstances, to restructure their loans by paying a specified percentage of the interest.

1. Support for Private Equity and Venture Capital Investments:

NRB will not blacklist private equity and venture capital (PEVC) even if their investee companies are black listed. This is aimed to encourage investment and provide more security to the investors because the very nature of PEVC is investing in other companies. And if they become black listed due to one company in their portfolio, this will affect other companies too. 

1. Promoting Use of AI in Licensed Institutions:

The policy also talks about promoting the use of Artificial Intelligence (AI) in the licensed entities. Not sure what this exactly means but maybe the central bank is talking about integration of AI in various aspects of banking and financial services.

1. Maintain Foreign Exchange Reserves sufficient to cover the importation of goods and services for up to 7 months: 

By maintaining such reserves, the country can safeguard against fluctuations in foreign exchange rates and unexpected economic disruptions, thereby supporting a stable and resilient economy.

1. Increase the Limit for Regulatory Retail Portfolio from Rs. 2 Crore to a Maximum of Rs. 2.5 Crore:

The change is intended to provide greater flexibility and capacity for managing retail assets, supporting financial institutions in their operations, and potentially enhancing investment opportunities in the retail sector.

1. Increase in Exchange Facility: 

The limit for foreign currency exchange for travel will be increased, and the number of countries for exchange will also be expanded.

1. Facilitation for Cooperative Depositors: 

Arrangements will be made to ensure that the depositors with blocked funds in cooperatives will be able to recover up to Rs. 5 lakh.

1. Study on Gold Import and Distribution: 

An assessment of the current system for gold import and distribution will be conducted.

1. Agricultural and Startup Loans: 

Loans will be provided against agricultural produce, and there will be encouragement for investment in startups.

Governor Adhikari emphasized that the objectives of this monetary policy are to tackle challenges in the capital market and to foster financial stability and growth within the banking sector. The new monetary policy is designed to be adaptable, aligning closely with government budget programs and the 16th development plan. 

So, what do you think? Do you think this monetary policy will be able to steer the wheels of Nepal’s economy towards growth? Or the gloom will continue! We will have to wait and watch. But in recent years, there is some hope and positivity and hopefully this monetary policy will further fuel these hopes.