Monetary Policy 2075/76; things we should be aware of and expect from NRB apart from banks’ merger & acquisition

-Aakriti Thakali

With the month of Ashad slowly etching its way towards the 32^nd, 24 hours per day, the anticipation of what the new monetary policy will bring is creating quite a murmur in the market. The basic wonder that engulfs the minds of people is, will it be in the market’s favor or will it turn out the way The Budget of 2075/76 did. The announcement of the monetary policy was supposed to come sooner, but got postponed due to a week long conference of the Governors of SAARC countries. It has also come into the light that the final touch ups in the policy is waiting for the local budgets to be passed. Hence after these two events, the monetary policy will see the light of day – hopefully before Ashad end.

However the thing to consider is, monetary policy doesn’t have a huge coverage like the budget. It’s more concentrated and directed towards managing the supply and demand of the money in the market and is formulated by the central bank of the country. The relation between budget and the monetary policy is that, the monetary policy is designed in a way that it’s consistent with the budget and aids in meeting the goals of the budget.

The Nepal Rastra Bank (NRB) has collected suggestions from all the related bodies and organizations and according to the officials at NRB only a few add-ons and approvals are pending.

There are a number of things that are covered in a Monetary policy, the most significant ones are concerning:

Consolidation of Banks and Financial Institutions (BFIs)

The last time when NRB increased the minimum paid-up capital requirement by 4 times to Rs. 8 billion, the primary goal was to push the companies to go for merger and acquisition (M&A). However, contrary to the expectations, the BFIs rampantly issued bonus and right shares to meet the requirement and only a few opted for M&A. So the plan for consolidation went down the drain there.

However, given the current liquidity shortage in the market and the interest rate wars between a few aggressive banks has made consolidation necessary more than ever. So we can expect something to come around on these grounds, but the tool that NRB will use is still unidentifiable. It can either be forceful merger, or another hike in minimum paid-up capital, or positive reinforcements to induce BFIs to voluntarily choose M&A.

Request from banks

Given the current shortage of liquid funds in the market, the bankers’ are lobbying for an expansionary policy. Under expansionary monetary policy, the NRB introduces policies that will increase the money supply in the market, decrease the general market interest rates and increase in the general aggregate demand. However, the expansionary policy is also characterized by decline in the currency value, thereby decreasing the exchange rate.

The most commonly used tools to implement these policies are called OMO (Open Market Operations). It refers to buying and selling of government securities like Treasury bills and government bonds to either increase or decrease the money supply. Considering the current shortages, it is likely that NRB will opt for the expansionary policy.

Along with the expansionary monetary policy, the banks have also forwarded other requests. Some of them are:

• Expand the overdraft limit which currently stands at 15%.
• Increase margin lending to 80% which currently is 50%.
• Increase loan-to-value ratio for home loans.

Interest rate

As mentioned in the preceding sections, interest rates play a very important role in determining which direction the economy chooses. If we go for expansionary policy, lower rate is the key and if we go for contractionary policy vice versa. So through effective interest rates and proper implementation, the economy can achieve price stability and low or stable inflation rate.

However as easy as it sounds, determining the interest rates is not an easy nut to crack. First of all, extensive research is required investigation all the possible impacts that will be created in all the sectors. Then if the given rate is found viable, it is necessary to access if that rate is attainable given the current macro and micro economic constraints.

So based the extensive research and its anticipated goals NRB determines the short-term interest rates, which then subsequently determines other rates throughout the economy. However, as a general citizen, borrower or investor what concerns us most is how it is going to affect the bank rates (rates on deposits and lending).

On the current encounters, we’ve seen rapid rise in the deposit interest rates given by banks. Despite the efforts of Nepal Bankers’ Association to limit the interest rates on saving and fixed deposits within 8% and 11% respectively, banks have gone beyond that. Such rise in deposit rates has also created a chain impact in the lending rates and as the lending rates go up, the entire investment environment of the country starts to crumble.

So, the first expectation of the private sectors and small & medium enterprises from the policy are the ways to curtail such high lending rate.

Call deposit accounts

Call deposit account is a hybrid form of a saving account and a checking account. It means that the account, like a checking account, has no fixed deposit along with the provision for unlimited deposits and withdrawal. Similarly, it also gives interest like a saving account. In Nepali Banks, like all other accounts the interest on call account also varies between the banks. However, according to the latest directive mandated by NRB the interest rate on call account can’t go above the banks’ minimum rate on savings account.

The current interest rates on saving accounts have seen quite a considerable inclination and given the current thirst for deposits among the banks the interest rates on call account of most banks ranges between 5% to 7%. The interest on call accounts also plays an identifiable role in the determination of base rate. Thus with higher interest rates, the base rate goes up eventually increasing the lending rate.

So to curtail or stabilize the base rate, it is equally essential to introduce a cap on call deposit interest rates or else the sky-rocketing rates on savings will lead to similar rise in call deposit rates, which will hurt the SMEs most and then everyone else too.

Interest rate corridor and market liquidity

The interest rate corridor is basically a tool that sets upper and lower limit of the rates, which aims at guiding the short term market interest rates toward the targeted rate. The concept of interest rate corridor was first introduced in Nepali economy on 2016/17 with a primary purpose to facilitate liquidity injection and mop-up from the market

However, till now the corridor has a flexible floor and ceiling rates, which means as the market moves the corridor also moves. The NRB injects money in the market when there is shortage by lending the BFIs at SLF rate which is fixed by the NRB itself. Similarly in case of excess liquidity, it invites them to park the excess cash at bank at the two-week deposit auction rate. The two week rates moves depending on the liquidity situation in the market. So it is determined by taking the weighted average interbank rate of commercial banks of two days ago and then 10 basis points (0.10%) is deducted to fix the two-week deposit rates. Thus in this system the ceiling was fixed but the floor wasn’t. Because of this the effectiveness of the interest rate corridor had come into question.

However, this year the NRB will likely introduce the ceiling and floor rates. The two-week deposit auction rate will be kept as the floor rate whereas the Standing Liquidity Facility (SLF) rate will be the ceiling rate and unlike past both the rates will be fixed by the NRB. The actual ceiling and floor rates will be public when NRB introduces the new monetary policy.

Other BFIs related issues

Other than the interest rates of the banks, what concerns the general public is the benefits and facilities that they’ll be receiving from the upcoming monetary policy.

During the budget announcement one point that has raised the hopes of the budding entrepreneurs is “Loan up to Rs 7 lakhs against academic certificate at 5% interest rate”. If this is successfully implemented than the entrepreneurial minds with brilliant ideas but no seed money will be definitely supported. Rs 7 lakh is not a small amount and if that can be obtained by collateralizing the academic certificates, it is definitely a great sign.

Similarly, prioritizing the productive sector for loan disbursement has long been in the pipeline. The percentage has also improved from back then. However it still hasn’t reached the level where we can be adequately be sure that it’s enough. The policy of NRB to direct 10% of total loans to agricultural sector has surely been bearing fruits so far. Similarly, NRB has also identified and segregated percentages for other productive sectors. So this year too, if we can prioritize minimum 25% of total loan to the mandated productive sector then this can prove to be a great milestone for Nepali Economy.

Moti Lal Dugar, MV Dugar Group

“Now I’ve done the calculations myself, if the NRB can make it mandatory for the banks to increase their hydro power lending to 5% this year, 10% next year and 15% the year after that, our own banking institutions will be fully able to finance our hydro power projects. If this trend is implemented, the percentage is also not drastically increased and because of that the banks will have enough time to divert their funds to productive sectors. From these funds only we will be able to produce more than 2000 MW electricity. This calculation is based on current loanable funds figure, this figure will increase every year surely. So why are we making such hue and cry saying we don’t have enough money, Nepali banks aren’t capable of big financing, blah blah blah.

Specifically, in hydropower sector, the earning starts only after the fourth year and then after settling the debt, the earning to shareholders start flowing only from 10^th year or so. So many a times the banks are reluctant to finance hydropower projects considering the longer term of repayment. But I feel against it. Because of the total funds in Nepal, more than 50% or around Rs. 11 kharba loanable funds comes from institutions like Citizen Investment Trust, Employee Provident Fund, Army and Police Fund and the like. And these institutions aren’t going to fly away or withdraw all their money at once. They might switch, but the fund will remain in the system. So, why are they afraid of bank-run? Run on the bank happens through individuals, institutions won’t run on bank usually. Individuals comprise only 50% and 50% is institutions and the lending in Hydro Power sector is only 3% right now. So where is the risk?”

So like Mr. Dugar said in our previous interview, if the investments/lending in Hydropower can be increased then that will fill a lot of gaps. We do realize the hindrances of it, but every rose has its thorn. We must figure out a way to not let the thorns block the way completely.

Similarly, in the Budget Speech FM Dr. Khatiwada had explicitly specified, “Bank accounts for all Nepali within one year”. With the implementation of the federal system and establishment of the local bodies, commercial banks are rapidly expanding to rural parts of the countries through branches, extension counters, branchless banking units, tab banking and so on. So once the banks meet their goal of expansion, it can be concluded with maximum amount of confidence that all parts of the country will have access to banking services in one way or other. However, opening bank accounts for all Nepali within one year might be a bit of a push. We still have a chunk of population whose daily fooding depends upon days’ earnings in such case what would they possibly do with a bank account.

In addition to this, a lot of people still don’t have citizenship certificates yet and without it the opening of bank account doesn’t even start. In the budget speech itself it was mentioned, “Citizenship certificate to be provided to poor families from 26 districts. Others within 2 years.” So bank accounts for all Nepali within a year won’t be very easy to attain.

Others

Apart from the above mentioned agendas, the monetary policy according to the information so far will be focused towards:

• Financial stability and infrastructural investment
• Promoting agriculture
• Stability in financial sector
• Maintaining the inflation rate within 5% to 6.5%
• Achieving the expected growth rate of 8%