Suspending application for new commercial banks and introducing stress testing for the first time in banking system, Nepal Rastra Bank (NRB)  unveiled new monetary policy on Wednesday. Discouraging city-centric banking services and real estate investment, the NRB through new monetary policy has encouraged banks to expand their financial services to the rural areas through incentives.

Expectations that the central bank would ease things for banks and financial institutions (BFIs) fell flat as the central bank extended the halt on admitting new applications for commercial banks.

The Monetary Policy for the fiscal year 2010-11  said the central bank would not take new applications until new provisions are made. NRB governor Yubaraj Khatiwada said the central bank would not allow the upgradation of financial institutions (FIs) without looking into their corporate governance and managerial capacity.

Releasing the policy, Khatiwada made it clear that the central bank would keep the door closed for new banks and financial institutions (BFIs) until the economy revives. However, banks and financial institutions with joint venture with foreign companies and huge capital and superior technology will be welcomed. The governor said the NRB would tighten the test criteria of directors of promoters before opening door to new BFIs. There are already 28 banks operating and three more are in the process of getting operating license.

The central bank for the first time will encourage the system of stress testing in the Nepali banking system which would predict the impact of economic ups and down in the financial system.

Recent stress testing report on Nepali banks by the International Monetary Fund had suggested that Nepal’s banking system carried high credit and liquidity risks with some banks facing high solvency risk.  In order to expand the financial services to the needy people, the NRB will be flexible regarding expanding presence of financial institutions by opening door for D and C class FIs to go into 30 districts with low financial access. The central bank has also prevented promoters of BFIs with more than 1 percent shares from taking loans even if they put more than 50 percent of their shares as collateral. Both the central bank and International Monetary Fund (IMF) have argued that it will weaken corporate governance. Nepal Bankers’ Association president Sashin Joshi said it was a bad decision adding that promoters should be allowed to put their assets as collateral as they have been banned from doing so for five years. “Moreover, it is not necessary to prohibit promoters to put their shares as collateral,” he added.

The policy brought before the fiscal policy against the existing tradition of first introducing the budget, has sought to maintain balance of payment (BoP) positive at Rs. 9 billion this year which is currently negative by around Rs. 5 billion, according to NRB. The BoP deficit had reached more than Rs. 22 billion in the last fiscal year, a record deficit in the last 26 years. The new monetary policy has targeted to maintain inflation at 7 percent.

It is doubtful if the central bank could be able to maintain price rise of goods and service at 7 percent because non-economic factors are mainly responsible for price rise in Nepal in recent years.

To promote exports, the new monetary policy has given let-ups in foreign exchange allowing firms to export goods more than worth US$ 500,000, above the existing US$ 200,000 limit. The deposit amount against the export amount that they must guarantee on the basis of bank guarantee or cash against document (CAD) has also been slashed to 1 percent from the existing 5 percent.

The interest rate for refinancing credits from the central bank has been slashed to 7 percent from 7.5 percent on which the BFIs can not charge more than 10 percent interest from their customers. The NRB will direct the BFIS to double their lending to productive sectors such as agriculture, energy, tourism and small and cottage industries within the next three years.

However, the business community is not content with the monetary policy. President of the Federation of Nepalese Chambers of Commerce and Industry Kush Kumar Joshi said that the policy does not allow them to invest abroad and has taken no concrete measures to reduce the interest rate for productive sectors.

The increase in banking rate to 7 percent from 6.5 percent may also increase cost of fund and increase lending rate as well.

source: Kathmandu Post (2010),"New policy harsh on banking sector",The Kathmandu Post, 28 July 2010,p. 8