Nepal Rastra Bank (NRB), the central monetary authority, has slightly tightened the Monetary Policy for fiscal year 2014-15, while incorporating provisions to expand credit for the purpose of meeting economic growth rate of six per cent envisaged by the fiscal policy.
A year after reducing the amount that banks and financial institutions must park at the central bank, NRB has once again asked banks and financial institutions (BFIs) to raise their cash reserve ratio — the portion of total deposits that BFIs must park at the central bank.
As per new Monetary Policy, commercial banks must park six per cent of total deposits at the central bank, up from five per cent in the last fiscal year.
Similarly, development banks must maintain a cash reserve ratio of five per cent this fiscal, as against 4.5 per cent in last fiscal. However, amount of deposit that finance companies must park at NRB has remained unchanged at four per cent.
Although hike in cash reserve ratio is not expected to have much impact on commercial banks — which have to maintain a liquidity ratio of 20 per cent — it is likely to marginally reduce their income as new provision will soak up funds that could have been invested in government securities.
However, the new provisions on cash reserve ratio will affect development banks, which do not have to maintain 20 per cent liquidity ratio.
“We have tightened the monetary policy for this fiscal as excess liquidity has started pulling down short-term rates,” Governor Yubaraj Khatiwada said, introducing the monetary policy today. “This may increase flow of credit towards (unproductive sectors) like share market and real estate sector, artificially raising asset prices. This may, in turn, destabilise financial sector.”
The banking sector has been facing the problem of excess liquidity for the last one year due to continuous hike in flow of remittance income. Currently, the banking sector has excess liquidity of around Rs 100 billion — money which is sitting idle in coffers of banking institutions.
To address this problem, the central bank has decided to make its open market operations effective and efficient, so that it can mop up or inject liquidity whenever needed. “In this regard, we will be conducting regular open market operations, emergency fine tuning operations and strategic operations as mentioned in the new Open Market Operation Bylaw,” Governor Khatiwada said.
Under the regular open market operations, repo and reverse repo will be launched through which the central bank will either extend deposits to or acquire deposits from banking institutions for a period of up to seven days.
Under the emergency fine tuning operation — which can be launched anytime during the week in case the liquidity level witnesses sharp fall or rise and tends to affect short-term interest rates — tools like repo, reverse repo and outright purchase auction will be used to mop up or inject liquidity for a period of up to three months. Similarly, under the strategic open market operation — which will launched to address structural problems in the banking sector — the central bank can go to the extent of issuing its own bonds.
To address the problem of excess liquidity, NRB is also allowing banks to invest up to 40 per cent of foreign exchange reserve in tools like call deposits, certificate of deposit and other secure instruments, abroad for a period of up to two years.
“The tools introduced by the central bank to manage liquidity are appealing. We now request NRB to expedite the process of formulating guidelines for immediate implementation of these measures,” Sanima Bank CEO Bhuvan Dahal told The Himalayan Times.
Along with the problem of liquidity management, the central bank is also facing the problem of directing credit towards the productive sector.
The central bank has already asked commercial banks to divert 20 per cent of their total credit towards the productive sector within mid-July 2015. However, banks have been able to channel only around 12 per cent of such loans so far, because of ‘investment climate, which still has not become friendly’. Yet, NRB has upped the ante and has now asked development banks and finance companies to extend 15 per cent and 10 per cent of their total loans to productive sector, respectively, within mid-July, 2016.
To give a boost to the productive, or real, sector, the Monetary Policy has also incorporated a provision under which cottage and small industries in operation can obtain a loan of up to Rs one million based on their transactions, while the new ones will be entitled to credit of up to Rs 500,000. Also, refinancing rate for agro, hydroelectric, livestock, poultry and fishery businesses has been cut down to four per cent from five per cent, Monetary Policy says.
“Along with this, NRB will also introduce provision to extend funds to enterprises that have obtained seed money from start-up funds proposed by the government.”
Inflation target at 8pc
The Monetary Policy of 2014-15 has set a target of containing inflation at eight per cent, in line with the projection of the fiscal policy. The NRB had projected consumer prices to rise by an average of eight per cent in the last fiscal as well, but had revised it to 8.5 per cent during the mid-term review of the Monetary Policy. But it is now almost sure that the target will not be achieved and stand over nine per cent. NRB has indicated that it may not be able to achieve this fiscal’s target as well, as the Monetary Policy has said: “It will be difficult to keep inflation at the targeted rate of eight per cent due to continuous increment in remittance income, high prices in India, rise in prices of petroleum products due to problems in the Gulf and domestic supply constraints.”
Key Figures
Bank rate: 8 per cent
Money supply growth rate: 16 per cent
Private sector credit flow growth: 18 per cent
Main objective
• Ensure price stability through effective management of excess liquidity
• Expansion of credit towards productive sector
• Ensure financial stability
• Raise access to finance
What’s in for consumers
• Foreign exchange facility of up to $10,000 per year can be availed for the purpose of health check-ups and purchase of medicines abroad
• Foreign currency account holders to obtain foreign exchange facility of up to $2,000 to purchase foreign goods and services online
• Foreign currency account holders to obtain foreign exchange facility of up to $10,000 to purchase goods and services abroad
• Foreign exchange facility of IRs one million will be extended to those renting machinery and equipment from India
Other highlights
• NRB to maintain a foreign exchange reserve that is able to finance imports of goods and services for a period of eight months
• BFIs that have failed to meet minimum regulatory capital requirement will be barred from expanding branches and extending dividend
• Moratorium on opening of new BFIs to continue this fiscal
• NRB to formulate Financial Sector Development Strategy this fiscal for overall development of the financial sector and its stability
• Mandatory for commercial banks to conduct credit rating of borrowers prior to extending big-size loans
• Interest spread to be used as a tool to gauge the professionalism of BFIs
• Institutional investors of financial intermediaries that have converted themselves into microfinance institutions allowed to hold up to 51 per cent shares, up from 25 per cent
• Microfinance institutions allowed to extend unsecured loans of up to Rs 200,000 to individuals, up from Rs 150,000; groups can obtain secured loans of up to Rs 500,000, up from Rs 400,000
• Loans of up to Rs 700,000 extended to women-promoted microenterprises to be categorised as deprived sector lending; provisions will be introduced to insure such loans
source: the himalayan times,18 july 2014
LINK
A year after reducing the amount that banks and financial institutions must park at the central bank, NRB has once again asked banks and financial institutions (BFIs) to raise their cash reserve ratio — the portion of total deposits that BFIs must park at the central bank.
As per new Monetary Policy, commercial banks must park six per cent of total deposits at the central bank, up from five per cent in the last fiscal year.
Similarly, development banks must maintain a cash reserve ratio of five per cent this fiscal, as against 4.5 per cent in last fiscal. However, amount of deposit that finance companies must park at NRB has remained unchanged at four per cent.
Although hike in cash reserve ratio is not expected to have much impact on commercial banks — which have to maintain a liquidity ratio of 20 per cent — it is likely to marginally reduce their income as new provision will soak up funds that could have been invested in government securities.
However, the new provisions on cash reserve ratio will affect development banks, which do not have to maintain 20 per cent liquidity ratio.
“We have tightened the monetary policy for this fiscal as excess liquidity has started pulling down short-term rates,” Governor Yubaraj Khatiwada said, introducing the monetary policy today. “This may increase flow of credit towards (unproductive sectors) like share market and real estate sector, artificially raising asset prices. This may, in turn, destabilise financial sector.”
The banking sector has been facing the problem of excess liquidity for the last one year due to continuous hike in flow of remittance income. Currently, the banking sector has excess liquidity of around Rs 100 billion — money which is sitting idle in coffers of banking institutions.
To address this problem, the central bank has decided to make its open market operations effective and efficient, so that it can mop up or inject liquidity whenever needed. “In this regard, we will be conducting regular open market operations, emergency fine tuning operations and strategic operations as mentioned in the new Open Market Operation Bylaw,” Governor Khatiwada said.
Under the regular open market operations, repo and reverse repo will be launched through which the central bank will either extend deposits to or acquire deposits from banking institutions for a period of up to seven days.
Under the emergency fine tuning operation — which can be launched anytime during the week in case the liquidity level witnesses sharp fall or rise and tends to affect short-term interest rates — tools like repo, reverse repo and outright purchase auction will be used to mop up or inject liquidity for a period of up to three months. Similarly, under the strategic open market operation — which will launched to address structural problems in the banking sector — the central bank can go to the extent of issuing its own bonds.
To address the problem of excess liquidity, NRB is also allowing banks to invest up to 40 per cent of foreign exchange reserve in tools like call deposits, certificate of deposit and other secure instruments, abroad for a period of up to two years.
“The tools introduced by the central bank to manage liquidity are appealing. We now request NRB to expedite the process of formulating guidelines for immediate implementation of these measures,” Sanima Bank CEO Bhuvan Dahal told The Himalayan Times.
Along with the problem of liquidity management, the central bank is also facing the problem of directing credit towards the productive sector.
The central bank has already asked commercial banks to divert 20 per cent of their total credit towards the productive sector within mid-July 2015. However, banks have been able to channel only around 12 per cent of such loans so far, because of ‘investment climate, which still has not become friendly’. Yet, NRB has upped the ante and has now asked development banks and finance companies to extend 15 per cent and 10 per cent of their total loans to productive sector, respectively, within mid-July, 2016.
To give a boost to the productive, or real, sector, the Monetary Policy has also incorporated a provision under which cottage and small industries in operation can obtain a loan of up to Rs one million based on their transactions, while the new ones will be entitled to credit of up to Rs 500,000. Also, refinancing rate for agro, hydroelectric, livestock, poultry and fishery businesses has been cut down to four per cent from five per cent, Monetary Policy says.
“Along with this, NRB will also introduce provision to extend funds to enterprises that have obtained seed money from start-up funds proposed by the government.”
Inflation target at 8pc
The Monetary Policy of 2014-15 has set a target of containing inflation at eight per cent, in line with the projection of the fiscal policy. The NRB had projected consumer prices to rise by an average of eight per cent in the last fiscal as well, but had revised it to 8.5 per cent during the mid-term review of the Monetary Policy. But it is now almost sure that the target will not be achieved and stand over nine per cent. NRB has indicated that it may not be able to achieve this fiscal’s target as well, as the Monetary Policy has said: “It will be difficult to keep inflation at the targeted rate of eight per cent due to continuous increment in remittance income, high prices in India, rise in prices of petroleum products due to problems in the Gulf and domestic supply constraints.”
Key Figures
Bank rate: 8 per cent
Money supply growth rate: 16 per cent
Private sector credit flow growth: 18 per cent
Main objective
• Ensure price stability through effective management of excess liquidity
• Expansion of credit towards productive sector
• Ensure financial stability
• Raise access to finance
What’s in for consumers
• Foreign exchange facility of up to $10,000 per year can be availed for the purpose of health check-ups and purchase of medicines abroad
• Foreign currency account holders to obtain foreign exchange facility of up to $2,000 to purchase foreign goods and services online
• Foreign currency account holders to obtain foreign exchange facility of up to $10,000 to purchase goods and services abroad
• Foreign exchange facility of IRs one million will be extended to those renting machinery and equipment from India
Other highlights
• NRB to maintain a foreign exchange reserve that is able to finance imports of goods and services for a period of eight months
• BFIs that have failed to meet minimum regulatory capital requirement will be barred from expanding branches and extending dividend
• Moratorium on opening of new BFIs to continue this fiscal
• NRB to formulate Financial Sector Development Strategy this fiscal for overall development of the financial sector and its stability
• Mandatory for commercial banks to conduct credit rating of borrowers prior to extending big-size loans
• Interest spread to be used as a tool to gauge the professionalism of BFIs
• Institutional investors of financial intermediaries that have converted themselves into microfinance institutions allowed to hold up to 51 per cent shares, up from 25 per cent
• Microfinance institutions allowed to extend unsecured loans of up to Rs 200,000 to individuals, up from Rs 150,000; groups can obtain secured loans of up to Rs 500,000, up from Rs 400,000
• Loans of up to Rs 700,000 extended to women-promoted microenterprises to be categorised as deprived sector lending; provisions will be introduced to insure such loans
source: the himalayan times,18 july 2014
LINK
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