As banks and financial institutions have been accumulating loanable funds for the past three years, the Nepal Rastra Bank has issued a review of its monetary policy to increase credit while keeping interest rates stable. The first quarterly review released on Monday includes measures to increase the limit of microloans against collateral, reduce the interest rate (permanent liquidity facility rate) paid by banks and financial institutions when they borrow from the National Bank, and increase the overdraft limit.

According to the new arrangement, citizens will now be able to borrow up to Rs 10 million in personal overdraft. Earlier, such a limit was only Rs 50 million. The personal limit for borrowing through overdraft was Rs 10 million in the past.

However, the National Bank had reduced the limit to Rs 50 million. Now, the limit has been increased from Rs 50 million to Rs 10 million. The National Bank wants this arrangement to ensure that more credit flows through overdraft. ‘The existing limit of personal overdraft loans provided by banks and financial institutions will be increased from Rs 50 million to Rs 10 million,’ the quarterly review of monetary policy said.

The National Bank has also made arrangements to revise the loan repayment schedule, keeping in mind the problems faced by borrowers who have received loans from microfinance financial institutions.

Similarly, the monetary policy arrangement is going to provide relief to institutional depositors. Because the Nepal Rastra Bank has abolished the provision that banks and financial institutions should keep the interest rate on institutional term deposits at least 1 percentage point lower than the interest rate on individual term deposits. Now banks and financial institutions will be able to give the same or higher interest rate on deposits to founder depositors like ordinary savers. Earlier, there was a provision that banks and financial institutions should keep the interest rate on institutional term deposits at least 1 percentage point lower than the interest rate on individual term deposits.

At a time when there is excess liquidity in the financial system, interest rates are the weakest in history, and there is no demand for loans, banks and financial institutions have been giving very low interest to institutions on term deposits. This is why they were in trouble after the interest income of founder depositors decreased. Now the Nepal Rastra Bank has abolished the provision.

Similarly, microfinance financial institutions will now be able to provide loans up to 1.5 million on collateral. This was the situation about four years ago. Since then, the National Bank had reduced the limit of 1.5 million to 7 million, citing problems in the microfinance sector. Now, the National Bank has again increased the limit of loans disbursed by microfinance financial institutions against collateral. However, the limit of loans disbursed without collateral by microfinance institutions has been kept unchanged.

The National Bank has provided loan restructuring and rescheduling facilities for flood/landfall-affected loans. Under this arrangement, enterprises/businesses in Ilam and other districts affected by floods/landfalls and other natural disasters will be able to restructure/reschedule loans. However, for this, they will have to pay at least 10 percent of the outstanding interest. The National Bank has provided this facility especially for borrowers affected by floods and landslides in Ilam and other districts.

‘A one-time restructuring/rescheduling of loans provided to enterprises/businesses in Ilam, which was affected by the recent floods/landslides, and other districts affected by natural disasters will be made by banks and financial institutions by charging a minimum of 10 percent interest,’ the National Bank has said.

Similarly, the National Bank has reduced the standing liquidity facility rate, which is the upper limit of the interest rate corridor, from 6 percent to 5.75 percent and the policy rate from 4.50 percent to 4.25 percent. The standing liquidity facility rate (upper limit) and the policy rate have been reduced with the aim of gradually reducing the distance between the lower and upper limits of the interest rate corridor and making the policy rate symmetrical in the middle of the corridor, said Ram Sharan Kharel, Head of the Research Department of the National Bank.

He said that this arrangement will reduce the interest rate that banks have to pay when taking loans from banks and financial institutions, which will reduce their costs. However, the NRB has maintained the fixed deposit facility rate, which is the lower limit of the interest rate corridor, at 2.75 percent. The NRB has maintained the existing arrangements regarding the mandatory cash balance and statutory liquidity ratio.

The main challenge facing the Nepalese economy at present is liquidity management, said Nepal Rastra Bank Governor Bishwanath Poudel. He said that the inability to expand investment in large infrastructure even in the context of sufficient liquidity and low interest rates within the banking and financial sector is a matter of concern.

‘Stateing that the investment of banks and financial institutions is focused on certain areas, credit should be expanded according to local needs,’ he said, ‘The expected results have not been achieved due to the failure to effectively implement the provisions laid down in the monetary policy.’ He said that economic activity would move forward strongly if credit flow could be increased, especially in agriculture, tourism, energy and production sectors.

He suggests that banks and financial institutions should focus on business expansion, ease of service delivery and effective use of technology instead of depending on their profit growth only on loan rates. ‘Banks should be proactive in fulfilling the objectives of monetary policy. Finance and monetary policies will become more flexible, banks and financial institutions should be ready to take advantage of that,’ he said, ‘In the current situation, banks should review their ‘loan packages.’ Questions have been raised about banks’ loans from various sectors. Now it is time for banks to review such packages.’

In the review of the monetary policy, banks and financial institutions have been given the facility to integrate/adjust branches with many branches. ‘In the context of increasing branch electronic payment transactions in the metropolis and the number of branches of banks and financial institutions in the metropolis, arrangements will be made to allow banks and financial institutions to integrate/adjust branches in the metropolis themselves,’ the review said.