Nepal Rastra Bank Unveils 25th Monetary Policy for FY 2083/84 with a Focus on High Economic Growth and Price Stability

Nepal Rastra Bank (NRB) has officially released its 25th annual monetary policy for the fiscal year 2083/84, maintaining a cautiously flexible stance to support the government's ambitious economic targets. The central bank aims to facilitate the government's goal of achieving a 7.0% economic growth rate by ensuring adequate monetary liquidity and managing foreign exchange efficiently. Here, policy flexibility has been introduced to encourage BFIs to expand lending and create an economic movement.

The limit for loans disbursed for the construction or purchase of private residential houses has been increased from Rs. 20 million (2 Crores) to Rs. 30 million (3 Crores). For the construction or purchase of a first home, a provision has been made allowing the Loan-to-Value (LTV) ratio for such loan disbursement to be maintained at a maximum of 80 percent, and for others, at a maximum of 70 percent. This will create some movement on real estate and construction sectors.

The existing limit for Personal Overdraft loans provided by banks and financial institutions has been increased from Rs. 5 million (50 Lakhs) and maintained at Rs. 10 million (1 Crore). This provision increases the consumption-based loans and boost consumption.

The existing single-obligor loan limit for margin-nature loans disbursed by banks and financial institutions against the collateral of shares has been increased from Rs. 150 million (15 Crores) to Rs. 250 million (25 Crores). Furthermore, a provision has been made allowing the amount in the regulatory reserve created against non-banking assets acquired by banks and financial institutions to be counted as supplementary capital for up to two years from the date of acquisition. This will give confidence to big investor of stock markets to take loan and make their portfolio stronger by leveraging their stock portfolio.

Loan disbursement thorough micro finance on collateral based loan has increased to Rs. 1.5 million from Rs. 0.70 million. Small size loan especially rural and low valued collateral zone people benefited from this policy.

Banks’ Efficiency Will Be Enhanced, and the Fund Gap for Cottage Businesses Will Be Eliminated:

When disbursing loans to agriculture and micro, cottage, small, and medium enterprises, a provision has been made allowing the valuation of collateral kept as security for loans up to Rs. 1 million (10 Lakhs) to be done by the employees of the banks and financial institutions themselves. In addition, when determining the repayment schedule for agricultural loans, a provision has been made to establish a repayment schedule that aligns with the nature of agricultural produce and production, matching the time when farmers harvest or sell their crops with the time they pay their loan installments.

Interest Rate Implication Analysis

This monetary policy comes at a time when interest rates are hitting historical lows, exhibiting symptoms of the Zero Lower Bound (ZLB), where short-term nominal interest rates approach zero. For instance, the policy rate set for the interest corridor by the Nepal Rastra Bank (NRB) previously featured an interest rate floor of 2.75 percent and a ceiling of 6 percent. As of Baisakh 2083, the weighted average interbank interest rate stood exactly at 2.75 percent. This clearly indicates that Nepal is facing a liquidity trap scenario associated with the Zero Lower Bound, meaning individuals prefer to hold cash rather than build the confidence required to invest. To counter this, the government must actively engage investors and demonstrate the generosity needed to provide them with meaningful incentives.

Moving Forward:

The government, the central bank, and Banks and Financial Institutions (BFIs) must collaborate closely and communicate their intentions clearly to investors. The government should assure long-term policy stability, while the central bank must mitigate the risk of capital flight and introduce policy incentives. Concurrently, BFIs need to guarantee financial support backed by stability, clarity, and mutual benefit.