Monetary Policy 2082/83: Call for Structural and Policy Reforms to Restore Private Sector Confidence

The Confederation of Nepalese Industries (CNI) has submitted a detailed set of recommendations to Nepal Rastra Bank (NRB) ahead of the upcoming monetary policy announcement. Despite signs of partial recovery in the economy, CNI President Rajesh Kumar Agrawal noted that full normalization is yet to be achieved. The recommendations were formally presented to NRB Governor Dr. Bishnu Prasad Paudel.

Monetary Policy Recommendations:

1. Policy Rate Effectiveness:
CNI observed that policy rate adjustments by NRB have not been reflected in commercial bank interest rates. Instead, banks have occasionally raised rates contrary to policy changes. Hence, mechanisms are needed to ensure banks align lending rates with NRB’s policy intentions.

2. Statutory Liquidity Ratio (SLR):
Although current SLR levels (12% for commercial banks and 10% for others) are acceptable, NRB should remain flexible to reduce it when economic activities pick up and liquidity tightens.

3. Replace Base Rate System:
CNI suggests replacing the outdated base rate system with international practices like MCLR or EBLR (used in India), which more directly reflect central bank policy changes in market rates.

4. Scrap Lending Floor Based on Base Rate:
CNI urges removing the rule that bars banks from lending below their base rate, as it prevents competitive lending for good projects and penalizes efficient banks.

5. Remove Interest Rate Spread Cap (Max 5%):
The cap on the spread between fixed deposit and savings deposit rates is deemed unscientific and should be scrapped to promote more market-driven rates.

6. Remove Monthly Rate Change Limit (±10% cap):
The rule limiting monthly rate adjustments to 10% is outdated and hinders banks’ competitiveness and flexibility, especially in a recovering market.

Macro-Prudential Measures:

1. Suspend Counter-Cyclical Capital Buffer (CCB):
CNI recommends suspending the current 0.5% CCB as it is technically inappropriate during a prolonged low credit growth phase. Nepal’s Credit-to-GDP gap is under 5%, which doesn't warrant CCB activation.

2. Reduce Directed Lending Requirement (45%):
CNI proposes reducing the mandatory lending to priority sectors, currently at 45%, as it limits banks' flexibility. For context, India has a 40% requirement.

Structural Reform Suggestions:

1. Reform NRB Board Composition:
NRB board members should be appointed based on expertise, not political or personal influence, to ensure professional governance.

2. Form an Internal Monetary Policy Committee:
CNI advocates for a dedicated MPC within NRB, including external experts and key officials, with decision-making authority – following global best practices.

3. Reposition NRB’s Supervisory Focus:
CNI warns against NRB's growing involvement in borrower-level regulation and urges the central bank to focus on financial stability and macro-level supervision, leaving borrower oversight to banks.

Additional Policy Recommendations for Economic Recovery:

1. Revoke New NPL and Group Loan Provisions:
The recent NRB classification rules (Unified Directive 2079) are seen as restrictive during economic hardship and should be repealed.

2. Suspend Working Capital Loan Guidelines:
Current provisions should be paused due to sustained low demand and economic stress. Sector-specific flexibility in working capital norms is also requested.

3. Coordinate Fiscal and Monetary Policy:
To support government plans (e.g., NPR 362 billion internal borrowing), NRB must align liquidity management and credit cost policies to avoid crowding out private investment.

4. Support Budget Priority Sectors:
Monetary policy should encourage credit growth in infrastructure, industry, startups, energy, and agriculture through refinancing, concessional loans, and priority lending.

5. Reassess Blacklisting Norms:
The rising trend in loan defaults and blacklisting (now at 5.35%) calls for a flexible, contextual revision of blacklisting rules, aligning with practices in peer economies.

6. Reform Microfinance Credit Limits:
CNI recommends restoring individual microfinance loan limits to NPR 1.5 million (from the recently reduced 0.7 million) and removing the 15% dividend cap to ensure financial viability and rural credit flow.