Key highlights of first quarter review of monetary policy

Himal Press 08 Dec 2023

Key highlights of first quarter review of monetary policy

KATHMANDU: The Nepal Rastra Bank (NRB) has unveiled the first quarterly review of the Monetary Policy for the fiscal year 2023/24, introducing several significant changes aimed at enhancing fiscal and monetary stability.

The central bank’s strategic adjustments reflect a nuanced approach to economic conditions and a commitment to fostering a favorable financial environment.

Just two days ago, Finance Minister Dr Prakash Sharan Mahat convened a meeting with Governor Maha Prasad Adhikari and the Board of Directors of the central bank. During the discussion, Minister Mahat advocated for a more flexible approach in the monetary policy review.

In the wake of the economic repercussions of the COVID-19 pandemic, the central bank has taken a stringent policy since the fiscal year 2020/21. However, recognizing the evolving circumstances, the central bank has gradually transitioned towards flexibility. The most recent monetary policy reflects this shift, demonstrating a more relaxed stance by the central bank to navigate the economic challenges.

In the first review of the monetary policy, the central bank has exhibited a more flexible approach towards real estate and margin loans. This shift contrasts with earlier public statements from Governor Adhikari who used to express concerns about the economy’s vulnerability due to substantial investments in these sectors. The recent monetary policy review, however, has reduced weighted risk for such loans.

Here are the key highlights from the recent monetary policy review:

1. Liquidity Management: Banks have utilized Rs 239.49 billion in liquidity from the central bank, contributing to a 58.67% surge in interbank transactions. This rise suggests a more relaxed liquidity situation in the banking sector.

2. Interest Rate Adjustments: Both short-term and long-term interest rates witnessed a decline in the first quarter. The weighted average interest rate on 91-day treasury bills plummeted from 10.14% to 4.94%, while the interbank transaction interest rate dropped from 8.51% to 2.26%.

3. Loans and Deposit Growth: Private sector loans experienced a moderate growth of 4.8%, a slight decline compared to the previous year. In contrast, deposit growth surged impressively by 14.9%, indicating robust liquidity in the banking system. The central bank has anticipated improved credit expansion as interest rates continue to decrease.

4. Risk Weight Adjustment: The risk weight for real estate and margin loans exceeding Rs 5 million has been reduced to 125%, providing some relief to borrowers.

5. Monthly Installment Ratio for Housing Loans: The monthly installment income ratio for housing loans up to Rs 50 million has been increased and maintained at 60%, potentially easing the burden on borrowers.

6. Loan Restructuring for Microfinance Borrowers: Borrowers in contact with microfinance institutions facing difficulties in servicing their loans are eligible to apply for loan restructuring until mid-April 2024.

7. Policy Rate Changes: The bank loan rate decreased from 7.5% to 7%, the policy interest rate was lowered from 6.5% to 5.5%, and the deposit collection policy rate was maintained at 3.0%.

8. BFIs’ Debentures: Bank and Financial Institutions’ (BFIs) debentures will be considered 100% as resources until mid-January 2024, after which they will be considered 50% until mid-July 2024.

9. Government Fiscal Indicators: Government expenditure increased by 0.9%, while revenue mobilization saw a growth of 5%. Total expenditure reached Rs. 280.57 billion, constituting 16% of the fiscal year’s allocation.

10. Debt Management: The government has raised Rs. 106.79 billion in the first three months, comprising internal debt of Rs. 97.31 billion and external debt of Rs. 9.48 billion. This is 23.6% of the amount that the government has targeted to raise in the current fiscal year.

11. Earthquake Response Measures: In response to the earthquake in Karnali Province in November, the loan limit for affected individuals has been raised to Rs. 2.5 million. Banks cannot add more than a 2% premium on the base rate on such loans.

Published On: 08 Dec 2023