Nepal Rastra Bank Unveils Monetary Policy Changes to Stimulate Market Activity

Nepal Rastra Bank Unveils Monetary Policy Changes to Stimulate Market Activity

The Nepal Rastra Bank, the central bank of Nepal, has announced changes through a monetary policy review with the aim of increasing economic enthusiasm and activity in the market.

In a statement after the review, Nepal Rastra Bank spokesperson Dr. Gunakar Bhatt said the monetary policy is focused on promoting economic stability, financial stability, and expanding economic activities.

Key Measures Announced:

  1. Facilitate necessary tools to solve capital problems for banks and financial institutions

  2. Reduce the loan loss provision ratio from 1.25% to 1.2% for good class loans

  3. Increase the ratio of loan to income for purchase of personal real estate to boost the real estate sector

  4. Reduce the risk weight for hire purchase loans above Rs 25 lakhs from 125% to 100% to increase lending capacity by Rs 3.5 billion

The central bank acknowledged economic growth will be reduced due to weak capital expenditure, an increase in youths going for foreign employment, laxity in real estate transactions, and cooperative sector problems.

New Authority on Cooperatives Only recently, through an amendment to the central bank Act, Nepal Rastra Bank has been given authority to formulate, monitor and take action on cooperative monitoring and regulation standards. The head of the regulation department, Guru Prasad Paudel, informed that internal preparations are ongoing to make necessary arrangements for cooperative monitoring and inspection.

Capital Boost The reduction in loan loss provisions is expected to help the capital fund along with profitability. Paudel said this will enable banks to "write back" around Rs 2.15 billion allocated for loan loss reserves, boosting their capital position.

Investment Flexibility
The policy has eased regulations around investments in shares, debentures and collective funds for banks and financial institutions. They can now invest up to 30% of primary capital across various instruments and sell up to 20% after one year, providing more flexibility compared to the previous 1% limit after one year.

According to the central bank, this provision aims to have a positive effect on banks, financial institutions and the securities market, while discouraging short-term securities investments.

Regulatory Easing

Dr. Prakash Kumar Shrestha, head of the central bank's Economic Research Department, stated that credit expansion was a concern due to financial system tightness. The regulatory policies have been eased to facilitate credit flows.

While monetary policy tools like cash reserve ratio, statutory liquidity ratio and policy rates remain unchanged, the review aims to boost economic activity through the regulatory adjustments as inflation declines and excess liquidity remains high at Rs 1.025 trillion.

Interest Rate Corridor Review

The central bank plans to review the interest rate corridor to make the permanent deposit facility more effective in liquidity management going forward.

Overall, the monetary policy review by Nepal Rastra Bank introduces measures intended to provide a stimulus for increasing lending, investments and transactions in key sectors like real estate to reinvigorate economic growth.

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