The government has set a target of 7% economic growth in the current fiscal year 2020/21. The Central Bank of Nepal, Nepal Rastra Bank (NRB), has formulated the Monetary Policy in line with achievement of such economic growth. The monetary policy has placed a special emphasis on investment in agriculture, energy and small and medium enterprises with the aim of minimizing the impact of COVID-19 on the economy. The policy aims to promote the Agriculture Development Bank as a leading bank for the development of the agriculture sector.
The sector wise highlight is presented below.
Agriculture Development Bank will be promoted as a leading bank in the agriculture sector. In order to facilitate the availability of long term resources in the agriculture sector, such bank will make an issue of agriculture bonds on which bank and financial institution can invest to maintain the ratio of investment in agriculture sector.
NRB will simplify the arrangement of credit sale/purchase (credit swap) of agriculture loans.
Commercial banks shall have to make investment in agriculture sector at least 15% total loans and advances by Mid July 2023.
The central bank will make an arrangement of “Kisan Credit Card” through Agriculture Development Bank to provide information related to financial and agriculture to the farmers.
In order to promote on self-reliance on energy and to support the Government of Nepal’s target of generating 5,000 MW of hydropower during the Fifteenth plan period, the central bank has made provision for commercial banks to invest at least 10% of their total credit investment in the energy sector by Mid July 2024.
The central bank will make arrangement for issue of Energy Bond through commercial banks that have gained investment experience in the energy sector. It will facilitate the availability of long term resources in the energy sector and will help the banks and financial institutions with low credit flow in the energy sector to maintain the minimum loan ration through investment in energy bonds.
Loan at the rate of base rate plus 100 basis points shall be provided for the period of 5 years from date of export.
Loan at the rate of base rate plus 100 basis points shall be provided for investment in improvement of Hydropower Projects.
The approval of NRB is not required for partial capitalization of interest for Hydropower whose operation has been commercially started but distribution line is yet to be completed.
Tourism and Cottage, Small and Medium Industry Sector
The monetary policy of FY 2020/21 focuses on minimizing the effects of COVID 19 pandemic on the economy of the nation.
Priority will be given to the flow of working capital, concessional loans and refinancing for the revival of aviation business, transportation, hotel, restaurant and other tourism enterprises which have been severely affected by the COVID 19 crisis.
In case of lack of capital to complete construction of projects related to the tourism sector, provision will be made for easy availability of loan from banks and financial institutions for such projects.
Commercial bank shall make investment of at least 15% of total loan and advances in cottage, small and medium industry in the form of loan amounts upto NPR 10 million by Mid July 2024.
Further development bank and finance companies shall make investment of at least 20% 15% respectively of their total loans/advances to agriculture, cottage, small, medium energy and tourism industry.
In the monetary policy, NRB has increased the limit of share pledge loan to provide relief to the capital market.
The central bank has increased the limit of margin lending loan from 65% to 70% of share value.
The valuation criteria of 180 days or the prevailing market price whichever is lower, changed to 120 days.
The monetary policy has increased the refinancing facility. The process of getting such facility has also been made easier. NRB shall provide 80% of refinancing amount to banks and financial institutions. Through such refinancing, bank and financial institutions can provide upto NPR 1.5 million per customer to small, medium and cottage industry, NPR 50 million for special and general refinancing and NPR 200 million for general refinancing based on the customer evaluation.
The central bank has made provision to provide upto 20% of total refinancing on the basis of customer assessment. Similarly, NRB has made a provision to provide upto 70% through commercial bank, development bank and finance companies and upto 10% though microfinance financial institutions.
Similarly, banks and financial institutions will be provided special refinancing in specified areas including export-oriented industries and sick industries at 1% interest rate, micro-domestic and small enterprises refinancing at 2% interest rate and general refinancing in specified areas at 3% interest rate. In such refinancing, the borrower has to pay only 3% and 5% interest respectively.
Bank and Financial Institutions
The existing standing liquidity facility (SLF) rate as the upper bound of the Interest Rate Corridor shall be 5 %, repo rate as the policy rate to 3.5% from 3% and the deposit collection rate as the lower bound to 1% from 2%.
The Cash Reserve Ratio of 3 percent to be maintained by banks and financial institutions is kept intact.
The statutory liquidity ratio to be maintained by commercial banks of 10 percent, while that of development banks of 8 percent and the finance company of 7 percent have been kept intact.
The lender of last resort rate has been kept intact at 5%.
The policy has made the provision for all bank and financial institutions to declare and distribute cash dividend only upto 30% of net distributable profit of the Fiscal year 2076/77 (not exceeding the weighted average interest rate of the deposit maintained by the said institution in Mid July 2020).
However, the distribution of cash dividends to the banks with a net distributable profit of less than 5% of the total paid up capital will be prohibited.
The credit to core capital plus deposit ratio (CCD) limit shall be increased from 80% to 85% until Mid-July 2021.
The provision for non-maintaining of regulatory reserve for recovery of interest upto 15 days after fiscal year end has been extended to 90 days.
The time period for issue of debenture of at least 25% of paid up capital has been extended to Mid July 2022.
Counter cyclical buffer of Capital Adequacy Framework 2015 has been withheld.
The risk weight against Operational Risk, Market Risk and Overall Risk based on supervisory review has been reduced to 3%, 1% and 3% respectively from 5%, 3% and 5%.
The loan falling under pass category in Mid Jan 2020 shall be classified under pass category and 5% loan loss provision shall be created.
Basel 3 shall be applicable from the fiscal year 2020/21 for the national level development on parallel basis.
The remaining balance left out in Corporate Social Responsibility fund from FY 2019/20 shall be transferred to COVID 19 prevention and control Fund established by Nepal Government.
Licensing process for new registration of microfinance has been withheld. In addition, the licensing process of microfinance institution (in the process of licensing) has also been canceled.
The credit limit has been increased on loan provided to poor, low income individuals, firms or groups engaged in agriculture, micro enterprise and business with acceptable collateral for commercial projects from NPR 700,000 to NPR 1,500,000.
Microfinance institutions can charge upto a maximum of 15% interest on loans. The central bank will make the determination of interest rate more systematic by fixing the base rate calculation method in MFIs.
Microfinance cannot make fixed deposit for tenure of more than 3 months for amount against other than long term funds in the bank and financial institutions.
A, B and C class license institutions and Microfinance providing wholesale lending cannot charge service fee of more than 0.5% on loan to microfinance for deprived sector lending.
Microfinance providing wholesale lending and accepting deposit form public shall publish the financial statements fiscal year 2020/21 based on NFRS.
A national payment switch will be established to further facilitate the payment system by maintaining records of all types of electronic transaction within Nepal.
The central bank has postponed the issuance of new permits other than those payment service operators (PSOs) and payment service providers (PSPs) who have received earlier in principle consent for the operation.
NRB can revoke the license of payment service provide (PSP) if it has not reached at least 300,000 customers by Mid July 2021 and the average number of monthly transaction has not reached at least 600,000.
NRB has made the merger voluntary. If the commercial banks start joint operation in accordance with the merger/acquisition policy by Mid July 2021, the central bank will offer the following additional incentives from the date of commencement of joint operation to Mid July 2022 in addition to the existing facilities.
Discount will be given by 0.5% point in CRR and 1% point in SLR.
The allowed institutional term deposit collection limit will be increased by 10% points.
The deposit collection limit per institution will be increased by 5% points.
The existing provision that a member of the Board of Directors and a high ranking employee shall not be allowed to join any other licensed institution before the cooling period of 6 months, shall not be applicable.
Extension of due date of loan, restructuring/rescheduling of loan
The arrangement of extension of due date of loan, restructuring/rescheduling of loan shall be made to all the industries including tourism, manufacturing, education, health, communication, entertainment which have been affected by lockdown due to COVID 19.
The short term loan including demand and cash credit whose expiry period is upto Mid July 2020 shall be extended/renewed to Mid Jan 2021 by making assessment of borrower.
The overdue interest and installment of loan upto Mid July 2020 of less affected borrower shall be extended to Mid Jan 2021.
The overdue interest and installment of loan upto Mid July 2020 of medium affected borrower shall be extended to Mid-April 2021.
The overdue interest and installment of loan upto Mid July 2020 of high affected borrower shall be extended to Mid July 2021.
Further, the industry including tourism sector which is highly affected by COVID and take time to revive the business shall be given additional time period.
The bank and financial institutions can reschedule/restructure the loan by recovering at least 10% of interest upon submission of written business plan until Mid-Jan 2020 by borrower falling under pass category in Mid Jan 2019.
The bank and financial intuitions shall provide additional 20% of working capital loan limit prevailing on Mid-April 2020 to the highly affected industry by COVID 19 to resume the operation.
NRB has made an arrangement to provide loan at 5% interest from banks and financial institution to pay the wages of the workers and employee of COVID affected tourism, cottage, small and medium enterprises and to give the opportunity of entrepreneurship development to those who have lost their jobs in the worst affected areas.
Until the duration of COVID 19, no charge will be levied if the ATM card of one BFIs is used in another BFIs.
A, B, C and D class financial institutions shall not charge service fee more than 0.75%, 1%, 1.25% and 1.5% respectively at the time of approval of loan.
NRB shall make arrangement for “Know Your Customer” information on centralized basis.
No any kind of penal and fee shall be levied on renewal/extension of overdue date of loan and installment.
Arrangement of discount option on Sight LC shall be introduced for deferred payment.
Payment limit of USD 50,000 shall be made on payment against DAA and DPP.
Payment limit of USD 30,000 has been increased to USD 35,000 for import against DD/TT from third countries.
The tenure of Usance LC has been increased to 180 days from 120 days.
The period against advance payment certificate has been increased to 4 months from 1 month.
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