KATHMANDU, Nov 26: Nepal Rastra Bank (NRB) prepares for the first quarterly review of its monetary policy for the current fiscal year 2024/25 amid challenges in addressing the problem of excess liquidity and rising bad debts in the Nepali banking sector.
The NRB on July 26 endorsed an expansionary monetary policy for the current FY taking flexible measures to ease liquidity in the country’s banking system. The central bank is mandated to carry out its first review within 45 days after the first quarter ends.
According to NRB officials, the central bank has expedited the first review process. “The first review is likely to be published this week,” said Dilli Ram Pokhrel, a deputy spokesperson, at the NRB.
Revised interest rate corridor system introduced
Although the monetary policy aimed to boost private sector lending and investment in the country, it is likely to fail in its target, as per the records maintained by the NRB. Through monetary policy, the central bank reduced the policy rate to five percent from 5.5 percent, while the lower ceiling of the corridor was kept at three percent.
Due to the initiative of the central bank, the average rate of interest on bank loans came down below 10 percent and fell below six percent on deposits. The private sector lending by banks stands much less than the target.
In the first three months of the current FY, banks and financial institutions (BFIs) issued loans worth Rs 128 billion to the private sector. The amount shows the growth of only 2.42 percent in the review period, while annual targeted growth of private sector lending has been maintained at 12.5 percent.
The share investors have now been looking for NRB to lift the upper limit of Rs 200 million for individual investors and cut the risk weightage on share loans to 100 percent from 125 percent. Earlier, NRB removed the limit on share collateral loans only for institutional investors.
Citing an excessive loanable fund with them amid ongoing economic slowdown, the BFIs have raised the margin loans in shares by 17.46 percent. The central bank now faces a challenge to diversify the BFI loan portfolio.
The NRB’s Strategic Analysis Report-2024 shows that a total of 94,477 debtors were blacklisted in the fiscal year 2023/24. In the last five years, the number of blacklisted borrowers has risen by 37 times. Of late, the number is soaring due to the inability of the borrowers of the BFIs to repay loans. The increased bad debts have also raised the non-performing loans (NPLs) of banks to as high as 5.84 percent while the average value stands at more than four percent.
Chandra Dhakal, president of the Federation of Nepalese Chambers of Commerce and Industry, told Republica that the NRB has to adopt a more flexible policy on working capital loans. “The loans in this segment appear vital to mobilize investment in a number of sectors of the economy,” said Dhakal, stressing the need to boost the private sector confidence coinciding with the fall in interest rates to a single digit.
As most of the economic indicators of the country post positive notes at present, the private sector is now expecting the NRB to come up with more flexibility in the first review of its signature policy. “Through the review, the central bank is most likely to come up with measures to manage excessive liquidity and growing NPLs of the BFIs,” said an NRB source.
