NRB to draft 2024-25 Monetary Policy with focus on new generation’s reform programs

KATHMANDU: Nepal Rastra Bank (NRB) is set to draft the monetary policy for the fiscal year 2024-25 with a focus on government reform programs targeting the new generation, as introduced in the recent budget. This announcement was made by Governor Maha Prasad Adhikari during a ‘Pre-Monetary Policy’ discussion organized by the Society of Economic Journalists-Nepal (SEJON).

Governor Adhikari noted that borrowers with excessive loans are hoping for an easy monetary policy, a trend he cautioned could lead to future economic issues. “Borrowers who are already facing trouble due to excessive loans expect monetary policy to solve their problems. However, monetary policy has its own limits. Borrowers asking for more loans now could create more severe problems in the future,” he stated. He emphasized that while borrowers should not expect the same level of support as during the COVID-19 pandemic, solutions to debt obligations are still sought through monetary policy.

Adhikari also addressed complaints about commissions during loan disbursement, labeling such practices as financial crimes and instructing NRB officials to take immediate action. He stressed that the state’s goal is to boost production, thus prioritizing loans for agriculture, energy, and small to medium enterprises (SMEs).

He explained that although banks profit more from issuing letters of credit for imports and handling payments, the NRB is directing credit flows towards productive sectors to enhance domestic production.

Insights from Financial and Economic Experts

Madhu Kumar Marasini, Secretary at the Ministry of Finance, added that the upcoming fiscal year’s budget aims for a 6% economic growth rate, with the monetary policy supporting this goal. He highlighted the availability of over NPR 600 billion for investment in the banking system, emphasizing the need for capital injection. Marasini pointed out that the Ministry of Finance prefers an open approach, aligning the monetary policy with new generation reforms to correct past mistakes and stimulate the economy.

Dr. Bishwanath Paudel shared insights on the liquidity within Nepal’s banking and financial institutions. He mentioned that these institutions have collected approximately NPR 6.2 trillion in deposits and disbursed around NPR 5.1 trillion in loans, indicating ample liquidity.

Despite this, loan disbursement has stagnated, impacting economic growth and government revenue. Dr. Paudel stressed the importance of directing liquidity towards productive sectors and warned against loans being diverted into shares and real estate, which could lead to economic inequality and potential collapse.

Dr. Paudel also highlighted that Nepal’s inflation is heavily influenced by inflation rates in India. He stressed the need to focus on production and maintain interest rates within desired limits to promote loan expansion in productive sectors. He suggested greater flexibility in working capital loan policies and urged the NRB to enhance its supervisory role, particularly in the microfinance sector.

Perspectives from Banking Sector Representatives

Sunil KC, President of the Nepal Bankers’ Association, emphasized the need to stop continuous attacks on the banking sector. He highlighted that more than ten commercial banks have reported negative distributable profits, and the return on investment (ROI) for banks has been declining for the past three years. KC called for collective attention to the declining profitability of banks, stating that the construction sector faces the most significant problems and needs targeted support.

KC clarified that the increase in bad loans is not solely due to banks’ lending practices but also the overall economic slowdown. He emphasized that supporting a highly regulated sector, which provides over 85,000 jobs, is crucial for economic stability.

Recommendations for the Upcoming Monetary Policy

Acting President of the Confederation of Bank and Financial Institutions Nepal (CBFIN), Rajesh Upadhyay, noted that the market has not yet accepted the reform programs initiated by the NRB. He highlighted the impact of the fourfold increase in capital of banks and financial institutions post-earthquake, which led to loan expansion but now requires adjustment. He stressed the need for the upcoming monetary policy to address recent pressures on banks due to accumulated liquidity and rising costs.

Dr. Sameer Khatiwada pointed out issues within the NRB Act, which remains silent on supporting the real sector. He emphasized the need to reconsider the continuation of monetary policies introduced during the COVID-19 pandemic for the next fiscal year, suggesting that the upcoming policy should prioritize external balance and price stability while also focusing on production and employment.