Monetary Policy of Nepal 2020- Highlights

Monetary policy is one of the tools that a national government uses to influence its economy.
Using its monetary authority to control the supply and availability of money, a government
attempts to influence the overall level of economic activity in line with its political and
economic objectives. Usually this goal is ‘macroeconomic stability’ that is low
unemployment, low inflation, economic growth and a balance of external payments.
Formulation and implementation of monetary policy is the major function of Nepal Rastra
Bank. NRB Act, 2002 provided a clear legal and institutional framework for monetary policy.
The monetary policy operating procedure was changed in response to the evolving needs of
the time. The formulation of monetary policy in Nepal formally received its institutional,
legal, and more transparent framework in recent decades only. NRB Act, 2002 broadly
provides the guidelines and institutional set-up for a monetary policy decision. It mandated
the annual announcement of monetary policy by incorporating the review of past policy,
programs for the following year, and the rationale for such programs. NRB began the practice
of formally announcing and publishing monetary policy statements starting from fiscal year
2002/03 which was a breakthrough in modernizing monetary policy through a more
transparent framework with public dissemination. The overall monetary policy covers
financial and foreign exchange policy as well.
By following the same Nepal Rastra Bank on Friday, July 17 has issued the monetary policy
for the fiscal year 2077/78.
Economic Outlook
Global Economic Outlook
The attached photos show the global economic outlook.

Source: International Monetary Fund, 2020

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Source: Nepal Rastra Bank, 2020
National Economic Outlook
The attached photos show the domestic economic outlook.

Source: Nepal Rastra Bank, 2020

The major provisions made by the Monetary Policy 2020 are listed as below;
Monetary Policy Direction
 Monetary Policy emphasis to help the Government of Nepal to achieve its economic
growth goals while maintaining macroeconomic stability.

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  Financial mobilization will be encouraged to expand economic activities, create
employment, and promote sustainable economic development.
 Liquidity will be managed to keep in view the pressure on price and external sector
stability.
 Emphasis on the integration and strengthening of banks and financial institutions for
the development and sustainability of the financial sector.
 Financial access and quality of service will be enhanced through the development of
financial infrastructure.
 Electronic payment transactions will be encouraged by making the payment system
efficient, robust, and secure.
Economic & Monetary Target
 Monetary policy has targeted to keep the inflation within 7%,
 Foreign exchange reserves will be maintained to cover imports of goods and services
at least for 7 months,
 Growth of Private Sector Credit and the Broad Money Supply (M2) is aimed to
limit at 20 % and 18 % respectively.
 Keeping economic recovery at priority, the monetary policy aims to maintain liquidity
to help to achieve the goal of economic growth.
Operating Targets and Instruments
 The interbank rate of commercial banks has been the target of monetary policy, but
now the weighted average interbank rate of commercial banks, development banks
and finance companies will be taken as the operating target of monetary policy.
 The upper limit/ceiling rate (Permanent Liquidity Facility Rate) of interest rate
corridor is set at 5% as it is and the lower limit/floor rate (Deposit Collection Rate)
is decreased from 2 % to 1 %.
 Repo (which is also known as Policy Rate) reduced from 3.5 % to 3%.
 The mandatory Cash Reserve Ratio (CRR) remains at 3 % for all the BFIs.
 The Statutory Liquidity Ratio (SLR) is set 10, 8, and 7 % for Commercial Banks,
Development Banks, and Finance Companies respectively.
 The Bank Rate, applied for the lender of last resort (LOLR) facility is kept at 5 %
Credit Management
Agriculture Sector Credit
 To revive the economy, credit investment in agriculture, energy, tourism, and
domestic, small, and medium enterprises will be encouraged.
 Commercial Banks should disburse at least 15% of the total credit investment to the
agricultural sector by July 2080.
 The Agriculture Development Bank will be developed as a leading bank in the
agricultural sector, and the bank will be able to issue agricultural bonds,
 And the ‘Kisan Credit Card’ will be provided through the Agriculture Development
Bank.

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 Energy Sector Credit
 To promote energy self-reliance, commercial banks should invest at least 10 percent
of the total loan in the energy sector by July 2081.
 Commercial banks with investment experience in the energy sector can issue energy
bonds.
 If a project starts exporting electricity, banks and financial institutions will have to
give loans to the project by adding only 1 percent to the base rate for 5 years after the
start of export.
Tourism Sector and Cottage, Small and Medium Enterprise Credit
 Priority will be given to various service-oriented businesses (which are most affected
by COVID-19) such as transport, hotel, restaurant, aviation business, etc., in the flow
of various concessional loans and refinancing facilities.
 Commercial banks have to disburse at least 15% of their total credit to the cottage,
small and medium sector enterprises in the form of loans of less than Rs. 10 million
by July 2081.
Concessional loan
 Provision has been made for commercial banks to disburse at least 500 loans or a
minimum of 10 loans per branch and national level development banks to disburse
at least 300 loans or a minimum of 5 loans per branch.
 In view of the impact of the Corona epidemic on the economy, concessional loan
programs for productivity growth, job creation, and entrepreneurship development
will be simply implemented. Such loans will be provided by BFIs to the borrowers at
the rate of 5 percent in the specified areas.
 By mid-July 2081, the Development Bank should disburse at least 20 % of the total
loan and the finance companies should disburse at least 15% of the loan to the
specified sectors including agriculture, micro, cottage, and small enterprises, energy,
and tourism sector.
Real Estate and Housing and Margin Loans
 The limit of Personal Residential Home Loan will be maintained at 60 %.
 The real estate loan limit should be maintained at 40% within the Kathmandu Valley
and 50% elsewhere.
 Margin Loan limit on the stock has been increased up to 70% from previously
mentioned 65%.
Economic Recovery Programs
Refinancing Facility
 Provision for refinancing up to 5 times of the available funds for refinancing.
 Provisions are also made for special refinancing at a 1% interest rate in specified
areas such as export-oriented industries, refinancing at a 2% interest rate in the
cottage, small and medium-sized enterprises, and general refinancing at 3% interest

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 rate in specified areas. In such refinancing, the borrower pays only 3%, 5%, and 5%
interest respectively.
 The limit of lump sum refinancing given to banks and financial institutions has
increased. Per person domestic and small enterprise refinancing limit of Rs 1.5
million, special and general refinancing limit of Rs 50 million and consumer
evaluation based refinancing limit of Rs 200 million have been fixed.
Provisions of Loan Related to Profession/Business Operation Which is Most Affected
by COVID-19
 Depending on the need of the borrower and the feasibility of the project/business to
run the highly affected profession/business from COVID-19, the concerned banks and
financial institutions will be able to disburse additional loan up to 20 percent of the
current capital credit limit established in Chaitra 2076 BS.
 Banks and financial institutions will be provided criteria based loans at a 5% interest
rate to re-operate, sustain and help in paying the remuneration of employees engaged
in the businesses including tourism, cottage, small and medium scale enterprises, and
other businesses affected by Corona, and similarly to provide entrepreneurial
opportunities to those who are ruthlessly affected by the pandemic, through the
mobilization of Rs. 50 billion funds to be established as provided in the budget of
fiscal year 2077/78.
 Provisions are made for the borrowers to get the facility to extend their loan
installment and interest payment period by 6 months to 12 months based upon the
nature of the harshness of the COVID effect on different loaned sectors.
Financial Sector Reinforcement
 To reduce the risk by strengthening the capital base, the merger, merger, and
acquisition process of commercial banks will be further encouraged.
 Arrangements will be made to merge the institutions that are directly / indirectly
owned and controlled by the same family and business group and have established
business relations with the same person or group.
 Mergers and acquisitions of MFIs will be encouraged to reduce the risk by
strengthening the capital base.
Regulation and Supervision
 The credit to core capital plus deposit ratio (CCD Ratio) will be increased from 80%
to 85%.
 Banks and financial institutions will be allowed to declare and distribute cash
dividends up to 30% of the net distributable profits of 2076/77. However, if the net
distributable profit is less than 5% of the total paid-up capital, the cash dividend
cannot be distributed.
 The deadline for commercial banks to issue debentures at least 25% of their paid-up
capital by Asadh 2077 has been extended to Asadh 2079.
 From the Fiscal Year 2077/78, the provision of Basel-III will be implemented in the
national level development banks.

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  Modify the stress testing guidelines of banks and financial institutions and bring them
in line with international standards.
Microfinance
 The licensing of microfinance institutions has been postponed. Similarly, the licensing
process of the organizations in the licensing process has also been cancelled.
 One year's time limit has extended to transact at the state level for that microfinance
which has registered to operate its functioning at the particular state only.
 The credit limit provided by microfinance is extended from Rs. 7 lakhs to Rs. 1.5
lakhs and the maximum interest rate charged to the customer is kept at 15 percent.
Payment System
 All types of financial transactions within Nepal will be encouraged to be done
electronically and a national payment switch will be set up to facilitate this.
 Postponement of new permission to open a payment service operator or a payment
service provider except previously agreed,
 Provision has been made to revoke the permission of PSP service providers if they
will not reach at least 300,000 customers and if the average monthly turnover does not
reach at least 600,000 by 2078.
 Guidelines will be issued to manage payments made through quick response (QR)
code in electronic payments
 To manage the business of government bonds, government bonds will be
dematerialized in coordination with the concerned agencies.
Foreign Exchange Management
 Following the provisions of Documents against Payment (DPA) and Documents
against Acceptance (DAA), the foreign exchange limit for import has been fixed at
USD 50,000.
 While importing goods from third countries through drafts, the foreign exchange
facility limit of up to USD 30,000 at a time will be increased to USD 35,000.
 The term of the letter of credit will be increased from 120 days to 180 days
 Encourage professional hedging work to minimize exchange risk associated with the
investment of foreign currency.
Institutional Good Governance, Financial Literacy, and Customer Protection
 Zero tolerance will be adopted in compliance with the guidelines on institutional
good governance.
 Given the need to maintain thrift due to the Corona epidemic, the arrangements
related to the remuneration and facilities of high-ranking employees of banks and
financial institutions and the Board of Directors will be reviewed.
 To make the service charges levied by banks and financial institutions on customers
more systematic and transparent, commercial banks, development banks, finance
companies, and microfinance companies can take service charges on loan approval
only up to 0.75%, 1%, 1.25%, and 1.50% respectively.

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  Penal interest, fee, or compensation will not be charged from the customer for
extending the principal or interest payment due to COVID-19.
 As long as COVID-19 is in effect, no charge will be levied if the ATM card of one
institution is used in the ATM of another institution.
 The Central Bank will set up a separate portal on its website for receiving and
managing inquiries and suggestions related to the banking services of the general
public.
Endnotes
The implementation of monetary policy is believed to revive the economy affected by the
epidemic while maintaining overall economic and financial stability. Although the Covid-19
epidemic poses a challenge to the economy, it is felt that the door is open for opportunities to
manage exports and promote electronic payment systems by boosting domestic production.
It is believed that with the increase in access to electronic systems, employment will be
created and entrepreneurship will be developed by increasing the production of electronic
instruments and devices. From the monetary policy of the Fiscal Year 2016/17, Nepal Rastra
Bank has started the practice of reviewing the monetary policy on a quarterly basis and with
this monetary policy has gained its momentum and dynamism and thus there is scope for
time-related revisions.
References
NRB (2020). Monetary Policy of Nepal. Retrieved from
https://archive.nrb.org.np/ofg/monetary_policy/Monetary_Policy_(in_Nepali)--2077-78_(Full_Text)-
new.pdf

IMF (2020). World Economic Outlook Update, June 2020. Retrieved from
file:///C:/Users/uSer/Downloads/WEOENG202006.pdf

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