Nepal Rastra Bank Holds Firm in Third-Quarter Monetary Policy Review; Shows No Swerve for Stock Market
The Nepal Rastra Bank has released its third-quarter review of monetary policy, opting to maintain stability by refraining from significant changes.
As of the end of Chaitra 2080, the total current and capital expenditures of the Government of Nepal have decreased by 8.9 percent and 9.2 percent, respectively, compared to the same period the previous year. However, revenue mobilization has increased by 9.4 percent, and internal borrowing from the market has nearly met the target, resulting in a contractionary stance in net public finance operations. Based on the trend of higher public spending in the fourth quarter, it is estimated that public expenditures will rise by the end of the current fiscal year.
The easy liquidity situation in the banking system has led to a decrease in both short-term and long-term interest rates. The weighted average rate of the 91-day Treasury bill dropped from 9.74 percent in Chaitra 2079 to 3.00 percent in Chaitra 2080. Similarly, the weighted average interbank rate among banks and financial institutions fell from 7.01 percent in Chaitra 2079 to 3.10 percent in Chaitra 2080. The average base rate of commercial banks decreased from 10.48 percent in Chaitra 2079 to 8.51 percent in Chaitra 2080. Additionally, in Chaitra 2080, the weighted average interest rate on deposits of commercial banks was 6.53 percent, and the weighted average interest rate on loans was 10.55 percent, down from 8.26 percent and 12.84 percent, respectively, in Chaitra 2079.
To enhance liquidity management and maintain the weighted average interbank rate within the interest rate corridor, a fixed deposit facility was implemented from Falgun 2080. The interbank rate among banks and financial institutions was maintained at 3.10 percent in Chaitra 2080, compared to 7.01 percent in the same month of the previous year.
The cautious yet flexible directives outlined in the annual monetary policy have been continued in the third quarterly review. Based on the current internal and external economic conditions and outlook, the policy rate of 5.5 percent, the deposit collection rate under the interest rate corridor of 3.0 percent, and the bank rate of 7.0 percent remain unchanged. Existing provisions regarding the required cash reserve ratio and statutory liquidity ratio have also been maintained. The provision of permanent deposit facilities will be reviewed as necessary to ensure the effectiveness of the interest rate corridor.
To further strengthen the capital base of banks and financial institutions, necessary facilitation will be provided for the use of additional instruments. The risk weight on hire purchase loans for vehicles will be reduced from 125 percent to 100 percent. The loan loss provision requirement for performing loans will be reduced from 1.25 percent to 1.20 percent.
In the review of the monetary policy, the Central Bank has introduced a provision where banks and financial institutions can sell up to 20 percent of their primary capital in one fiscal year from investments made in the mid-category, as well as a provision allowing for the extension of loans for home purchases based on the Debt Service to Gross Income Ratio, from the existing 50 percent to 70 percent, based on the presentation of appropriate evidence.
The Central Bank has not adopted a cautious policy in share margin financing. While investors have been demanding the removal of the cap on share-backed loans and a reduction in risk burdens, the Central Bank has not addressed this issue.
