Monetary Policy of Nepal 2020-Highlights

Monetary Policy of Nepal 2020- Highlights

Monetary policy is one of the tools that a
national government uses to influence its
economy. Using its monetary authority to
control the supply and availability of money, a
government attempts to influence the overall
level of economic activity in line with its
political and economic objectives. Usually this
goal is ‘macroeconomic stability’ that is low
unemployment, low inflation, economic growth
and a balance of external payments.
What is
Monetary
Policy?
Tilak Singh Mahara, 2020

Formulation
of Monetary
Policy in
Nepal
• NRB Act, 2002 provided a clear legal and institutional framework
for monetary policy.
• The formulation of monetary policy in Nepal formally received its
institutional, legal, and more transparent framework in recent
decades only.
• NRB Act, 2002 broadly provides the guidelines and institutional
set-up for a monetary policy decision.
• NRB began the practice of formally announcing and publishing
monetary policy statements starting from fiscal year 2002/03 which
was a breakthrough in modernizing monetary policy through a more
transparent framework with public dissemination.
• The overall monetary policy covers financial and foreign exchange
policy as well.
• By following the same Nepal Rastra Bank on Friday, July 17 has
issued the monetary policy for the fiscal year 2077/78.

 Monetary Policy emphasis to help the Government of Nepal to achieve its
economic growth goals while maintaining macroeconomic stability.
 Financial mobilization will be encouraged to expand economic activities, create
employment, and promote sustainable economic development.
 Liquidity will be managed to keep in view the pressure on price and external
sector stability.
 Emphasis on the integration and strengthening of banks and financial institutions
for the development and sustainability of the financial sector.
 Financial access and quality of service will be enhanced through the development
of financial infrastructure.
 Electronic payment transactions will be encouraged by making the payment
system efficient, robust, and secure.
MonetaryPolicyDirection

 Monetary policy has targeted to keep the inflation within 7%,
 Foreign exchange reserves will be maintained to cover imports of
goods and services at least for 7 months,
 Growth of Private Sector Credit and the Broad Money Supply
(M2) is aimed to limit at 20 % and 18 % respectively.
 Keeping economic recovery at priority, the monetary policy aims
to maintain liquidity to help to achieve the goal of economic
growth.
Economic & Monetary Target

 The interbank rate of commercial banks has been the target of monetary policy, but
now the weighted average interbank rate of commercial banks, development banks
and finance companies will be taken as the operating target of monetary policy.
 The upper limit/ceiling rate (Permanent Liquidity Facility Rate) of interest rate
corridor is set at 5% as it is and the lower limit/floor rate (Deposit
Collection Rate) is decreased from 2 % to 1 %.
 Repo (which is also known as Policy Rate) reduced from 3.5 % to 3%.
 The mandatory Cash Reserve Ratio (CRR) remains at 3 % for all the BFIs.
 The Statutory Liquidity Ratio (SLR) is set 10, 8, and 7 % for Commercial Banks,
Development Banks, and Finance Companies respectively.
 The Bank Rate, applied for the lender of last resort (LOLR) facility is kept at 5 %
Operating Targets and Instruments

Agriculture Sector Credit
 To revive the economy, credit investment in
agriculture, energy, tourism, and domestic, small,
and medium enterprises will be encouraged.
 Commercial Banks should disburse at least 15% of
the total credit investment to the agricultural sector
by July 2080.
 The Agriculture Development Bank will be
developed as a leading bank in the agricultural
sector, and the bank will be able to issue agricultural
bonds,
 And the ‘Kisan Credit Card’ will be provided
through the Agriculture Development Bank.
Energy Sector Credit
 To promote energy self-reliance, commercial banks
should invest at least 10 percent of the total loan in
the energy sector by July 2081.
 Commercial banks with investment experience in
the energy sector can issue energy bonds.
 If a project starts exporting electricity, banks and
financial institutions will have to give loans to the
project by adding only 1 percent to the base rate for
5 years after the start of export.
Credit Management

Credit Management
Tourism Sector and Cottage, Small and
Medium Enterprise Credit
 Priority will be given to various service-
oriented businesses (which are most affected
by COVID-19) such as transport, hotel,
restaurant, aviation business, etc., in the
flow of various concessional loans and
refinancing facilities.
 Commercial banks have to disburse at least
15% of their total credit to the cottage, small
and medium sector enterprises in the form of
loans of less than Rs. 10 million by July
2081.
Concessional loan
 Provision has been made for commercial banks to disburse at
least 500 loans or a minimum of 10 loans per branch and
national level development banks to disburse at least 300 loans
or a minimum of 5 loans per branch.
 In view of the impact of the Corona epidemic on the economy,
concessional loan programs for productivity growth, job
creation, and entrepreneurship development will be simply
implemented. Such loans will be provided by BFIs to the
borrowers at the rate of 5 percent in the specified areas.
 By mid-July 2081, the Development Bank should disburse at
least 20 % of the total loan and the finance companies should
disburse at least 15% of the loan to the specified sectors
including agriculture, micro, cottage, and small enterprises,
energy, and tourism sector.

Credit Management
Real Estate and Housing and Margin Loans
 The limit of Personal Residential Home Loan will be maintained at
60 %.
 The real estate loan limit should be maintained at 40% within the
Kathmandu Valley and 50% elsewhere.
 Margin Loan limit on the stock has been increased up to 70% from
previously mentioned 65%.

Refinancing Facility
 Provision for refinancing up to 5 times of the available funds for
refinancing.
 Provisions are also made for special refinancing at a 1% interest
rate in specified areas such as export-oriented industries,
refinancing at a 2% interest rate in the cottage, small and medium-
sized enterprises, and general refinancing at 3% interest rate in
specified areas. In such refinancing, the borrower pays only 3%,
5%, and 5% interest respectively.
 The limit of lump sum refinancing given to banks and financial
institutions has increased. Per person domestic and small enterprise
refinancing limit of Rs 1.5 million, special and general refinancing
limit of Rs 50 million and consumer evaluation based refinancing
limit of Rs 200 million have been fixed.
Economic
Recovery
Programs

Economic
Recovery
Programs
Provisions of Loan Related to Profession/Business Operation Which is Most
Affected by COVID-19
 Depending on the need of the borrower and the feasibility of the project/business
to run the highly affected profession/business from COVID-19, the concerned
banks and financial institutions will be able to disburse additional loan up to 20
percent of the current capital credit limit established in Chaitra 2076 BS.
 Banks and financial institutions will be provided criteria based loans at a 5%
interest rate to re-operate, sustain and help in paying the remuneration of
employees engaged in the businesses including tourism, cottage, small and
medium scale enterprises, and other businesses affected by Corona, and
similarly to provide entrepreneurial opportunities to those who are ruthlessly
affected by the pandemic, through the mobilization of Rs. 50 billion funds to be
established as provided in the budget of fiscal year 2077/78.
 Provisions are made for the borrowers to get the facility to extend their loan
instalment and interest payment period by 6 months to 12 months based upon
the nature of the harshness of the COVID effect on different loaned sectors.

 To reduce the risk by strengthening the capital
base, the merger, merger, and acquisition process
of commercial banks will be further encouraged.
 Arrangements will be made to merge the
institutions that are directly / indirectly owned
and controlled by the same family and business
group and have established business relations
with the same person or group.
 Mergers and acquisitions of MFIs will be
encouraged to reduce the risk by strengthening
the capital base.
Financial
Sector
Reinforcement

 The credit to core capital plus deposit ratio (CCD Ratio)
will be increased from 80% to 85%.
 Banks and financial institutions will be allowed to
declare and distribute cash dividends up to 30% of the
net distributable profits of 2076/77. However, if the net
distributable profit is less than 5% of the total paid-up
capital, the cash dividend cannot be distributed.
 The deadline for commercial banks to issue at least 25%
of their paid-up capital by Asar 2077 has been extended
to Asar 2079.
 From the Fiscal Year 2077/78, the provision of Basel-III
will be implemented in the national level development
banks.
 Modify the stress testing guidelines of banks and
financial institutions and bring them in line with
international standards.
Microfinance
 The licensing of microfinance institutions has
been postponed. Similarly, the licensing
process of the organizations in the licensing
process has also been cancelled.
 One year's time limit has extended to transact
at the state level for that microfinance which
has registered to operate its functioning at the
particular state only.
 The credit limit provided by microfinance is
extended from Rs. 7 lakhs to Rs. 1.5 lakhs
and the maximum interest rate charged to the
customer is kept at 15 percent.
Regulation and Supervision

 All types of financial transactions within Nepal will be
encouraged to be done electronically and a national payment
switch will be set up to facilitate this.
 Postponement of new permission to open a payment service
operator or a payment service provider except previously
agreed,
 Provision has been made to revoke the permission of PSP
service providers if they will not reach at least 300,000
customers and if the average monthly turnover does not reach
at least 600,000 by 2078.
 Guidelines will be issued to manage payments made through
quick response (QR) code in electronic payments
 To manage the business of government bonds, government
bonds will be dematerialized in coordination with the
concerned agencies.
Payment
System

 Following the provisions of Documents against
Payment (DPA) and Documents against Acceptance
(DAA), the foreign exchange limit for import has been
fixed at USD 50,000.
 While importing goods from third countries through
drafts, the foreign exchange facility limit of up to USD
30,000 at a time will be increased to USD 35,000.
 The term of the letter of credit will be increased from
120 days to 180 days
 Encourage professional hedging work to minimize
exchange risk associated with the investment of
foreign currency.
Foreign
Exchange
Management

 Zero tolerance will be adopted in compliance with the guidelines on
institutional good governance.
 Given the need to maintain thrift due to the Corona epidemic, the
arrangements related to the remuneration and facilities of high-ranking
employees of banks and financial institutions and the Board of Directors will
be reviewed.
 To make the service charges levied by banks and financial institutions on
customers more systematic and transparent, commercial banks, development
banks, finance companies, and microfinance companies can take service
charges on loan approval only up to 0.75%, 1%, 1.25%, and 1.50%
respectively.
 Penal interest, fee, or compensation will not be charged from the customer for
extending the principal or interest payment due to COVID-19.
 As long as COVID-19 is in effect, no charge will be levied if the ATM card of
one institution is used in the ATM of another institution.
 The Central Bank will set up a separate portal on its website for receiving
and managing inquiries and suggestions related to the banking services of the
general public.
Institutional
Good
Governance,
Financial
Literacy, and
Customer
Protection

Monetary Policy of Nepal 2020-Highlights

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Monetary Policy of Nepal 2020-Highlights

Similar to Monetary Policy of Nepal 2020-Highlights (20)

Recently uploaded

Recently uploaded (20)

Monetary Policy of Nepal 2020-Highlights