- CA. Prawin Karki
Nepal Rastra Bank (NRB), the monetary authority unveiled the Monetary Policy for fiscal year 2075/76 with the aim to aid in the ambitious growth targets (GDP growth of 8%) taken by the government earlier in Budget for fiscal year 2075/76. NRB had challenges like managing the current credit crunch situation, controlling interest rates and unhealthy competition in the market, imparting provincial structure in banking and developing access to finance, addressing current slump in capital market, etc. which it aims to fulfill through the Policy.
As an instrument for managing credit crunch faced by Banks and Financial Institutions (BAFIs), the requirement of CRR has been relaxed to 4% flat from 6% and 5% respectively for ‘A’ class and ‘B’ class institutions. Similarly, SLR requirement has been relaxed from 12% to 10%, 9% to 8% and 8% to 75 for ‘A’, ‘B’ and ‘C’ class institutions respectively. But such relaxations are not expected to address the crunch as current crunch is due to deficit of loanable fundscapped at 80% of domestic deposits and core capital by CCD ratio though some interbank deposit will increase due to relaxation in CRR and SLR requirement of ‘B’ and ‘C’ class institutions. This relaxation will help in bringing down base rates and consequently lending rates due to decrease in cost of CRR and cost of SLR. Provision of foreign currency debt including in INR will to some extent to manage the credit crunch but a proper mechanism shall be developed by NRB in consultation with stakeholders for effective implementation of this provision. Further, rule of RBI to allow INR loan only to settle payables in India will be a problem which needs instant solution.
Reduction topermissible spread rate from 5% to 4.5% effective from the end fiscal year 2075/76 is likely to hit the profitability of some banks which are operating in high spread rates. This will push banks to look into other avenues of earnings and focus more on fee based income which will diversify their income sources thereby reducing income concentration risk for future.
Interest rate corridor range has been squeezed from 3%-7% range to 3.5%-6.5% range though policy rate has been kept constant at 5%.This provision is expected to control and bring down fluctuations in interbank interest rates.
To reduce concentration risk that the banks are exposed to, limit for deposit collection from one institutional depositor has been decreased from 20% to 15% and limit for total institutional deposit collection has been kept at 45%. This will encourage banks to diversify and granulize their deposit portfolio by reaching out to untapped rural markets. Similarly, banks will be allowed to increase interest rate by 1% over published rates while bidding for big institutional deposits.
On lending front, NRB has squeezed the scope of priority sector by including only agriculture sector, energy and tourism sector under it for ‘A’ class institutions and changed the minimum requirement to 10% in agricultural sector and 15% in energy and tourism sector. Lending to electric public vehicles will also be priority sector lending. Earlier loans provided to export oriented industries, cement, garment and medicine industries, apart from agriculture, energy and tourism, could also be included to comply with priority sector loan requirement of 25%. For ‘B’ and ‘C’ class institutions, earlier requirement has remained unchanged.
Deprived sector lending requirement has been increased to 5% from 4.5% and 4% for ‘B’ and ‘C’ class institutions respectively. Similarly, the scope of deprived sector loan has been widened by incorporating loans up to 15 lakhs to enterprises operated by females and loan against educational certificate to marginalized students and business loans to backward community in group guarantee. There will be arrangement of interest subsidy as well for such lending.
Inconsistency has been observed in provision of margin call requirement relating to loan against security of shares. NRB intended to relax the provision of margin call with this but its interpretation and recent circular from NRB will instead increase the number of margin calls. Recent circular from NRB issued for implementation of monetary policy states that margin call is required if price falls by 20% or more but it is not required if security coverage is more than 1.6 times of loan outstanding. The earlier provision was that margin call was required if price fell by 10% or more but not required if security coverage was more than 1.5 times of loan outstanding. This means that margin call will be required for those additional loans with security coverage from 1.5 times to 1.6 times of loan outstanding with new requirement. NRB should assess the technicality of impact of the circular and its intention to promote confidence in secondary market and modify the circular as soon as possible.
There is additional requirement of rating by credit rating agency for loans more than 50 crore and verification of working capital requirement (stocks, receivables and payables) i.e. stock audit for working capital loans more than 25 crore. These provisions will encourage financial transparency and financial discipline at borrowers’ end. Though cost of borrowing will increase for borrowers, it will help in proper counterparty risk assessment for BAFIs and reduce risk of over financing.
Tax clearance certificate/tax paid receipt/ tax paid statement has been made mandatory for new loans or renewal of loans relating to firms/companies. Similarly, a mechanism will be developed for sharing of information relating to tax returns and details provided to financial institutions.
As far as monitoring of BAFIs is considered, NRB intends to develop financial and other performance indicators and indices relating to financial sector and publish the same on a regular interval. Commercial banks will be required to conduct credit rating once in each financial year which is expected to enhance corporate governance, risk management and operational efficiency. Introduction of separate audit of big branches shall enrich compliance, risk management at branch level and improve monitoring of branch level transactions.
Commercial banks will be required to establish Province Level Offices in every province within Poush end 2075. Similarly, provisions will be made for national level banks to function in provincial structure. Monitoring of branches, corporate governance, risk management, complaint handling relating to branches at province shall be coordinated by such province level offices. With many commercial banks already expanding their business in regional structure, this provision will require them to re-work their structure and help integrate financial sector to the federal structure that the country is moving into. This provision will also encourage banks for network expansion at the same time strengthening their monitoring and control mechanism.
Commercial banks can now venture into security brokerage business by establishing subsidiary for such purpose.This move of NRB is expected to widen the scope of securities transactions by using aggressively expanding footprints of commercial banks. Further, this will help banks in income source diversification.
NRB has tried to address the long outstanding issue of currency devaluation risk faced by foreign currency investors which was a major hurdle in attracting foreign investment by conceptualizing development of hedge fund. But establishing modality, ownership, cost and operating procedure of such hedge fund will sure be a difficult task to overcome. Similarly, introduction of loan in NPR against deposit in foreign currency for FDI project is expected to safeguard FDI projects against NPR devaluation risk.
Amid discussions and extensive media coverage regarding forceful big mergers, NRB has taken a rather liberal approach to merger/acquisition of commercial banks by not adopting forceful merger. NRB has taken an encouragement policy for merger/acquisition if required for sustainability and improvement of financial sector as a whole.
For microfinance institutions, strict provision has been made to verify multiple banking/multiple loans for single borrower/group and single borrower limit while providing loans. Similarly, the policy has pressurized microfinance institutions to report their borrowers’ details to credit information center regularly. If such reporting is not done in a timely manner, additional loan loss provisioning of 2% will be required.
To stabilize the high interest rates in microfinance institutions, they will be allowed to load 3% to cost of funds as charge for administrative expenses. Earlier they could add up to 4%. Similarly, premium for calculation of interest rate to borrower can be up to 6% which was up to 7% earlier. The maximum ceiling of interest rate of 18% has been discontinued.
