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01 Aug, 2024

Nepal Rastra Bank Monetary Policy FY 2081/82: Key Takeaways & Implications

The Nepal Rastra Bank (NRB) has unveiled its Monetary Policy for FY 2081/82, providing a strategic framework aimed at ensuring economic stability, driving growth, and enhancing financial inclusion. This policy is crucial for navigating Nepal's economic landscape. Below is a comprehensive overview of the policy and its implications.

Key Objectives of the Monetary Policy

The NRB’s policy for FY 2081/82 focuses on the following key objectives:

  • Maintaining Economic Stability: Minimizing economic fluctuations to foster a stable environment for growth.
  • Encouraging Sustainable Growth: Promoting long-term, inclusive, and environmentally sustainable economic expansion.
  • Ensuring Financial Stability: Strengthening the financial system to prevent crises and protect depositors.
  • Enhancing Financial Inclusion: Expanding access to financial services for all segments of the population.

These goals are integral to creating a stable and prosperous economic environment.
 

Inflation Control Measures

Inflation control is central to the policy, with a target range of 5% this year. Key measures include:

  • Control the Money Supply: Regulating the money in circulation to prevent excessive inflation.
  • Adjust Interest Rates: Modifying rates to influence borrowing and spending.
  • Utilize Monetary Tools: Employing various tools to manage economic activity and price stability.

These measures are designed to keep prices stable and preserve purchasing power.

Economic Targets for FY 2081/82

The policy sets out several important targets:

  • Inflation Target: ~5%
  • Economic Growth Projection: 6% GDP growth
  • Foreign Exchange Reserves: Sufficient to cover at least 7 months of imports
  • Broad Money Supply Growth: Expected at 12%
  • Credit Expansion to the Private Sector: Expected at 12.5%

These targets aim to balance economic stability with growth and development.
 

Exchange Rate Management

To support international trade and investment, the NRB plans to:

  • Manage the Foreign Exchange Market: Intervene as needed to stabilize the exchange rate.
  • Maintain Stability of the Nepalese Rupee (NPR): Prevent significant fluctuations.
  • Ensure a Competitive Exchange Rate: Support export competitiveness and investment inflows.

Financial Inclusion and Access to Credit

The NRB is focused on improving financial inclusion through:

  • Expanding Banking Services: Reaching underserved and rural areas.
  • Promoting Digital Banking: Encouraging digital banking solutions.
  • Supporting Microfinance Institutions: Assisting those serving low-income populations.
  • Offering Low-Interest Loans: Providing favorable loan terms for critical sectors.

These initiatives aim to integrate more people into the financial system.

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Strengthening the Banking Sector

Key measures to fortify the banking sector include:

  • Enhancing Regulatory Oversight: Stricter oversight to ensure adherence to best practices.
  • Improving Risk Management: Encouraging better risk management strategies.
  • Enforcing Compliance with International Standards: Meeting global banking standards.

Key Provisions for Banks:

  • Capital Adequacy Ratio: Set at 11%
  • Liquidity Requirements: Minimum of 20%
  • NPA Reduction: Targeting below 5%
  • Upper Limit Interest Rate Corridor: Reduced to 6.5% from 7%
  • Policy Rate: Lowered from 5.5% to 5%

Reduced Provisioning Requirement for Banks:

  • Provisioning for Pass Loans: Reduced from 1.20% to 1.10%, expected to improve bank profitability.

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Key Focus on the Microfinance Sector

The central bank is prioritizing the microfinance sector with several measures:

  • Merger and Acquisition: Encouraging the consolidation of microfinance institutions to address sector issues.
  • Regulatory Review: Revising the framework for interest rates and service charges, with a current maximum interest rate of 15%.
  • Loan Restructuring: Allowing restructuring of loans for customers facing unforeseen circumstances by paying a specified percentage of the interest.

Support for Private Equity and Venture Capital Investments

To boost investment security and encourage private equity and venture capital (PEVC):

  • Blacklisting Policy: NRB will not blacklist PEVC firms if their investee companies are blacklisted, aiming to provide more investment security.

Promoting Use of AI in Licensed Institutions

The NRB is advocating for:

  • Artificial Intelligence Integration: Encouraging the use of AI in various aspects of banking and financial services to enhance efficiency and innovation.

Promoting Investment and Economic Growth

The policy includes provisions to stimulate investment and growth:

  • Incentives for Green Investments: Encouraging eco-friendly projects.
  • Support for Infrastructure Projects: Backing major infrastructure developments.
  • Favorable Investment Environment: Creating attractive conditions for investors.

Additional Updates:

  • Deadline Extension: For repaying interest on loans to construction businesses until Mangsir 2081.
  • Share Collateral Loans: Lifted the limit of Rs. 20 crore on share collateral loans for institutional investors; capped at Rs. 15 crore for individuals.

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Addressing Challenges and Opportunities

The policy tackles key challenges with targeted measures:

  • Climate Change and Sustainability:
    • Incentives for Green Projects: Tax incentives and lower interest rates for renewable energy investments.
    • Sustainable Finance Framework: Encouraging ESG criteria in lending practices.
    • Support for Climate Resilience: Projects enhancing climate resilience.
  • Global Economic Uncertainties:
    • Adaptive Policies: Adjusting interest rates and managing liquidity.
    • Foreign Exchange Reserves: Maintaining reserves for at least 7 months of imports.
    • International Collaboration: Engaging with international bodies to navigate uncertainties.
  • Structural Reforms:
    • Agricultural Support: Enhancing productivity through increased credit access.
    • Industrial and Service Sector Development: Improving infrastructure and removing barriers.
    • Banking Sector Strengthening: Maintaining capital adequacy and liquidity ratios, and reducing NPAs.

Additional Key Policy Updates and Provisions

Recent updates include:

  • Regulatory Retail Portfolio Limit: Increased from Rs. 2 crore to Rs. 2.5 crores.
  • Non-Performing Loans (NPL) Classification:
    • Watchlist Period: Loans placed under a watchlist for 6 months before reclassification to Pass loan after regularization.
    • Review Provisions: For blacklisting and freezing accounts based on cheque bounce cases.
    • Anti-Money Laundering and Terrorism Act: Strengthened efforts by adding high-risk industries to the GoAML system.
  • Interest Accrual: Banks can book accrued interest from Asadh 2081 as earned if recovered by Shrawan 2081.
  • Collateral-Free Loans: For individuals going abroad for employment by obtaining foreign employment permits by assuring the remitted funds to be remitted to respective banks accounts.
  • Exchange Facility Limits:
    • Increased Limits: From USD 35,000 to USD 50,000 for imports of goods and services through Draft/TT.
    • Import Limit under DAP/ DAA: Raised to USD 1 Lakh.

Conclusion

The NRB’s Monetary Policy for FY 2081/82 is a forward-looking framework designed to guide Nepal towards economic stability, growth, and financial inclusion. By focusing on key areas such as inflation control, exchange rate management, financial inclusion, and digital transformation, the policy aims to foster a conducive environment for sustainable development.

Stay updated on these changes and their potential impacts by following the latest updates from the Nepal Rastra Bank.

For further reading, check out the official press release and this article on the new monetary policy from Ekantipur.

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