The monetary policy of the financial year 2082/83 announced by the National Bank has revealed interest, possibilities and enthusiasm among stakeholders. The private sector is more enthusiastic.

It is felt that the public sector needs to set some more strategies. Especially the increasing amount of bad loans, doubling of foreign exchange reserves, the demand for loans despite the decrease in interest rates, the lack of growth in the demand for loans, the investment of banks and financial institutions not operating as expected, working capital loans and investments in real estate business have pointed out the need for more strategies for the successful implementation of monetary policy. Based on these aspects, some possibilities are discussed in this article.

Improvements to be made in the quality of loans

Compared to last year, there has been some progress in credit expansion this year. Along with this, the ratio of bad loans has also increased. The ratio of bad loans increased from 3.98 percent in March 2081 to 5.24 percent as compared to March 2080. Monetary policy has clearly failed to bring about any policy effort to reduce it. 

First, rescheduling such loans can make it easier for the borrower to repay the loan. Second, willful non-payers can be prosecuted and recovered. Thirdly, the mortgaged immovable property can be auctioned. Fourth, the debtor can be forced to sell the property with the loan. Fifth, there is also a provision for witnesses in big debts, recovery can be done from them too. 

We have laws and institutional structures like Bank and Financial Institutions Debt Recovery Act, Debt Recovery Tribunal, Debt Recovery Appellate Tribunal. It is a serious matter if the ratio of bad loans is increasing despite their sincere efforts. In that case, the National Bank has to review the guidelines, policies and strategies related to the investment of banks and financial institutions. 

There are a few possibilities to explore before embarking on the path to debt recovery through mortgage auctions. As the borrower becomes at risk, the bank itself can collaborate with the borrower to involve investors in new opportunities and by changing the loan repayment cycle, such businesses can also be rescued. In this, the bank itself helps the investors in the role of advisor and also recovers the loan. Such practices have been used by some community banks working in the Midwestern states of North and South Dakota, Wisconsin, Iowa, Michigan, Indiana, Nebraska, etc., and they have brought effective results.

Similarly, other customer-centric strategies have also been successful. For example, mortgage auctions can be put on hold for a while, lowering interest rates if the loan has started to be paid off. In 2008, many banks plunged into the financial crisis due to their investments in the US real estate business, but some national banks were saved by such efforts. In Nepal too, it has become very important to adopt original measures to prevent bad loans from spreading to other banks and financial institutions created by cooperatives.

interest rate

Through the new monetary policy, the bank rate, which is the upper limit of the interest rate corridor, was reduced from 6.5 percent to 6 percent, and the deposit collection interest rate, which is the lower limit, was determined from 3 percent to 2.75 percent. Interest rates on investments are also mostly in the single digits. However, even though there is a marginal increase in loans to the private sector compared to Pohor, there is no significant improvement. On the contrary, the problem of capital flight has started to appear due to low interest rates. Therefore, instead of focusing only on interest rates, there is a need to adopt other measures to boost investment.

There are some reasons why investment does not increase even when the interest rate is low, so solutions should be found accordingly. The first possibility is a contraction in domestic demand and export competitiveness due to economic stagnation. Due to this, the overall market has become narrow. Second, even if the cost of capital utilization decreases, the competitive price of other means of production cannot be maintained. Take wage rates for example. According to the latest data in South Asia, the minimum wage rate is currently the highest in Nepal, according to the latest increase, the minimum wage rate in Nepal is currently around 19,000 rupees, while in other South Asian countries it is less than 15,000 rupees (in Nepali currency). But the productivity of workers is relatively low in Nepal. In this way, the minimum wage rate in Nepal is relatively high, productivity is low, the price of land is very high, and due to reasons such as high rent and poor road transport, foreign goods have become cheaper than domestic goods in some goods. Foreign investment has also not increased due to these reasons. The country has not become an attractive destination for foreign investors as both land and labor wages are expensive. On the contrary, the interest rate lower than the inflation rate has increased the possibility of capital flight.

Foreign Exchange Reserves

Monetary policy aims to reach seven months of convertible foreign exchange imports of goods and services. But according to the latest data, there is a reserve of foreign currency in the banking system that can cover the import for more than 14 months. A certain amount of foreign exchange reserves is required mainly for three reasons. First, to keep the domestic currency within certain limits in case of fluctuations in the exchange rate of the domestic currency with the foreign currency. Second, to address imbalances where international trade has become unfavorable for countries. Third, for a balanced relationship between currency and capital markets. But we see the need for it only to cover imports. For us, it is neither linked to the exchange rate, nor to investment itself. It is also not advisable to hold more foreign currency than required. Because this accumulation also indicates that some opportunities are being lost. The monetary policy could not take any special policy effort to mobilize the convertible foreign currency when the reserve has doubled than the requirement.

There are three general types of effects of excess foreign exchange reserves. First, it is missing out on investment opportunities. Second, when the interest rate is low, it gradually gets converted into consumption and puts pressure on inflation. Third, it can destabilize the domestic financial system. The central bank has failed to address these potential consequences. The supply side is so strong that it has to be linked to the exchange rates to revalue the Nepali currency, which is almost impossible under the current exchange rate system adopted by the central bank. Therefore, it was necessary to go to other productive options of foreign exchange reserves.

Investment of banks and financial institutions

Banks and financial institutions can invest in shares and debentures of any organized organization for a period of more than one year only. At present, banks and financial institutions have accumulated more than 7 billion investable capital. Therefore, if the mentioned provision is removed even if it is for a short period of time, it would be easier to manage the liquidity even if it is to some extent. On the other hand, even after a year has passed, Rashtra Bank directives have controlled the sale of a significant amount of shares and debentures at once.

The provision to sell only 20 percent in a year, if a bank or financial institution wants to sell the shares of an organized organization completely, it will take five years for that. Due to this, a situation has been created that has to be hesitated even when investing. The stock market largely determines the state and direction of the capital market and helps to keep the market moving. Therefore, in the current context where flexible monetary policy has been adopted, if it is not controlled too much, it would have helped to address the problem of excessive liquidity of banks and financial institutions.

Provisions of working capital loans and real estate loans

So far, there is no data available on the amount of investment of banks and financial institutions in the field of "real estate". But in the study report of Rashtra Bank three years ago, it appears that about two-thirds of the loans flowed to the private sector. Recent statistics are also around this. According to the new monetary policy, the current capital loan guidance will be modified as needed based on the nature of business and loan repayment and income, including agriculture, small and domestic industries, education, health, sports, communication and media houses. The coming days will tell how the current capital loans going to these areas will be modified, but if those loans of current capital nature are not facilitated, then the low interest rate and simple credit system will only increase the investment in real estate. Therefore, in the context of loosening the loan for real estate, it is likely to turn into an unproductive investment in the entire banking sector, so some strategy is needed.