Monetary Policy Today

'The meeting of the board of directors has been scheduled for Friday morning, and it is ready to be made public tomorrow,' said the source As the bank has already completed its internal preparations last week, it is going to release it by incorporating the government's suggestions.

The opinion that the budget of the current financial year cannot solve the existing problems of the economy and make the economic activities sustainable has come from the umbrella organizations of the private sector. Therefore, the expectations of private and other sector stakeholders are high towards monetary policy. The private sector has the experience of providing relief to the economy by addressing the problems of the economy through loose monetary policy when the financial policy (budget) could not meet the expectations of the citizens during the covid infection.

This year too, the private sector has repeatedly requested the National Bank to bring loose monetary policy like in the past. Due to fragile government finances, the government's capital expenditure has not increased as expected. Overall market demand has not increased, productivity is continuously decreasing, credit demand has not increased due to the inability to expand further investment, while more than 8 billion investable funds have accumulated in the financial system. Unemployment is increasing as there are many small and medium enterprises and no new jobs are being created. The private sector expects the monetary policy to ease the knots of the economy in transition.

Former President of Nepal Bankers Association Bhuvan Dahal said that the National Bank should find a solution to the existing problem of money being wasted in the financial system and credit not being provided through monetary policy. "In a country like Nepal, it is unfortunate that around 20 trillion rupees of foreign currency is accumulated and not used," he said, "The main reason for the lack of credit demand is not only the business confidence of the industrialists but also the banks. We should work to increase their confidence through monetary policy.'

As bad loans are increasing, banks are having to make provision for losses. Extending some time by amending the existing provisions on loss provisions will increase the confidence of banks and financial institutions to extend loans. "The current guidance on working capital loans does not address the practical problems of the private sector," he said. The commitment should come in the monetary policy.'' Dahal's suggestion is that the government should pay the rest of the liabilities even if the banks have enough money by taking loans from them cheaply in coordination with the National Bank. "By doing this, on the one hand, more liquidity in the bank is managed, on the other hand, all stakeholders get paid," he said.

monetary policy has its limits. Even if the National Bank wants to, it does not want to go beyond that limit and should not go. However, experts say that Rashtra Bank has the facility to introduce loose monetary policy this year in a moderate manner compared to previous years. Foreign exchange reserves like a year or two ago are running out, current account and current account deficits are widening, interest rates It is not the case that

is increasing now. The country's foreign exchange reserves continued to set new records for the 12th time last May. Foreign exchange reserves have reached around 20 billion rupees. About 25 months ago, when the condition of foreign exchange reserves was critical, the National Bank had introduced a tight monetary policy.

Now the situation has changed. There is no situation in which the foreign exchange reserves are under pressure if there is more foreign exchange going out of the country due to more imports or any other reason. Rashtra Bank claims that this reserve will cover 15.1 months of goods and 12.6 months of goods and services imports. In the current financial year, the National Bank had set a target of maintaining foreign exchange reserves that would cover at least 7 months of imports. Experts say that the National Bank should make use of the said indicator as it gives an opportunity to bring a relatively loose monetary policy.

Currently, although there is liquidity in the financial system, since many banks and financial institutions have reduced lending capacity, the National Bank should increase their lending capacity through monetary policy. "If the interest rate is low, the loan demand will increase, it is not applicable in our case. This was confirmed by the lack of demand for loans despite very low interest rates and sufficient liquidity in the banks," he said. "In order to increase the demand for loans, the self-confidence of the private sector must increase. The main responsibility of increasing self-confidence lies with the government. But the National Bank can increase the lending capacity of banks by improving the supply side through monetary policy.'

In order to increase the credit disbursement capacity of banks, Bhattarai suggests that by reducing the risk burden of loans flowing in the sectors such as hydropower, micro, small and medium entrepreneurs, tourism, transportation, agriculture, and information technology, which are currently called priority sectors, they should be encouraged to expand investment in those sectors. At present, 100 percent loss should be arranged for bad loans within one year. "Many years ago, there was a rule that 100 percent loss should be arranged within five years," he said, "by amending the current system, banks should come up with a policy to make 100 percent loss arrangement for bad loans within at least two years."

In the procedures related to current capital loans, the National Bank has made a similar policy arrangement for all types of businesses and industries. Bhattarai suggests that it should be modified and different policy arrangements should be made by sector (productive, non-productive, export, infrastructure development etc.).

In the same way, sources said that the National Bank, which has been ruthless in credit expansion for the past two years, is preparing to introduce a relatively loose policy this year. The Rastra Bank is also discussing the inclusion of measures to encourage credit expansion in the new monetary policy. Similarly, the sources said that there is no possibility of using the policy rate (the interest rate paid by banks and financial institutions when taking loans from the National Bank) through monetary policy as there is sufficient liquidity in the market and interest rates are also falling.

Currently the policy rate is 5.5 percent. But there has been extensive discussion on whether to revise the Compulsory Cash Ratio (CRR). Some have argued that raising CRR when there is no credit flow will send a negative message to the market. Arkathari's argument is that the CRR is currently at a low level, there is enough liquidity in the system and the National Bank has to spend a lot of money to manage it, so the current rate should be increased. These issues will be resolved at the last moment, so nothing can be said now. However, if the current 4 per cent CRR were increased by 0.5 or 1 percentage point, there would be room for reduction later when liquidity is tight,” the source said.

Similarly, the source said that there was a discussion about how to bring policies to increase credit expansion without disturbing the financial stability. The only thing the National Bank can do on the supply side is the supply side of loans. This includes policies such as reducing interest rates and not allowing liquidity to decrease, but now there is no problem with the indicators, said the source, although discussions are being held on how to increase credit flow in the productive sector within its limits.

This year, construction and industry, small and medium entrepreneurs, hydropower, etc., which have a negative growth rate, are also being discussed on how to make the loans cheaper. "There is a discussion about the loan restructuring and rescheduling facility program for these areas," the source said.

Like many investors, it seems very unlikely that the monetary policy will address the share mortgage loan. "There have been many suggestions such as increasing the loan limit and reducing the risk burden from sectors such as shares, real estate, and auto," said the source, "but these sectors must also be addressed in some way." Limits are set. "If the said arrangement is completely removed, it may be accused that the policy is not stable, so the said limit can be increased or the said arrangement can be removed for the organization," the source said, "The stock market has been increasing continuously since the last three years." Rashtra Bank is not ready to bear the accusation that it has decreased due to tight monetary policy. For this reason, there will be no worse policy for the stock market.'

The government has announced a decade of agriculture and a digital decade in the budget. As digital banking is one of the priority areas of Rashtra Bank, a new program has been launched for the development and expansion of domestic and international payment systems in the monetary policy.

Central Bank Digital Currency, National Switch etc. are said to be included in the policy. Although there is a possibility of more time to be delivered to the mandatory guided areas in agriculture, the new program is not significant.

Similarly, there is a possibility of revising the limit of 15 percent interest rate set for microfinance financial institutions. "Many of the suggestions given by the high-level study committee regarding the microfinance sector have not been implemented," said the source, "those suggestions will be included in the monetary policy." This will give some relief to microfinance from the current tight situation.'

This time, the arrangement regarding the establishment of Asset Management Company (AMC), which is also mentioned in the monetary policy, but has not been implemented, is sure to be included in the monetary policy. According to the source, this time the Rastra Bank will address the establishment of an asset management company in the monetary policy considering the increasing bad loans of the banks, the decrease in the ability of banks to provide more loans while arranging the losses due to the bad loans, and the situation when the assets were sold for debt recovery. Nothing is said about how the company will be, regulatory arrangements etc. However, something may come about the establishment of the company," said the source.

It is the property management company's job to purchase and manage the assets acquired by banks and financial institutions. If the loan is not recovered, there is a legal provision that banks and financial institutions can collect the mortgage themselves and sell the property to recover the loan. Now, due to the slowdown in real estate, there is no sale of mortgages issued by banks and financial institutions.

Similarly, the monetary policy is less likely to give priority to matters such as subsidized interest loans, re-loans, etc. directed by the budget.