KATHMANDU: The central bank today brought a ‘cautious’ Monetary Policy for the current fiscal year with focus on mobilisation of excess liquidity in the financial system to productive sectors through refinancing, despite doubts regarding its effectiveness.
The central bank has tried to channel investment to hydropower, agriculture, small and medium enterprises, and export industries by providing refinancing facilities for loans floated in the designated sectors. However, the monetary policy for fiscal year 2012-13 did not bring any concrete policy to ensure the flow of funds in the sectors.
According to the policy, agro and hydro loans will get refinancing facility at 6.5 per cent, and refinancing of loans for productive sectors, and for fisheries and poultry businesses will be at six per cent. Banks are not allowed to charge more than nine per cent interest rate to refinance such loans. Likewise, loans floated to export industry, sick industries, cottage and small industries, and credit for foreign employment, will be refinanced by Nepal Rastra Bank (NRB) at 1.5 per cent. Financial institutions can charge up to 4.5 per cent interest for these loans at maximum.
“In theory, refinancing works as an instrument that encourages lending to the private sector but its effectiveness is doubtable in the Nepali context,” pointed out senior economist Prof Dr Bishwambher Pyakurel.
Despite the existing refinancing facility, NRB has not been able to refinance less than a couple of billions to financial institutions due to bureaucratic hassles and numerous pre-conditions. “By the mid-term review of monetary policy, central bank must be able to produce a testimony of the effectiveness of refinancing in channelling credit to productive sectors,” he said.
NRB has targeted to contain inflation at 7.5 per cent in the current fiscal year, though it failed to keep the price rise level at its target of seven per cent last fiscal year.
“We have set an ‘achievable ‘ and ‘optimistic’ target this fiscal year despite outward risks of fuel price hike and international prices,” said central bank governor Dr Yubaraj Khatiwada. The central bank has fixed eight per cent bank rate from seven per cent that will be applicable for loans
under lender to last resort facility, and standing liquidity facility, along with the discount rate of government securities. The central bank has continued becoming liberal in providing foreign exchange facilities by increasing the limit
on foreign exchange to $10,000 from $6000.
A citizen can exchange $2,500 twice in a fiscal year against passport’s testimony and those visiting third countries for official purposes can acquire foreign currency of up to $5000 for each visit.
As a shift in policy, the central bank has allowed banks that have foreign currency in their agency banks abroad to invest up to 30 per cent of their balance in minimum risk instruments like call deposits and certificate of deposit. “It will provide banks a placement facility so that there will not be any term mismatch between the banks’ payment schedule, and it is just a step in liberalising capital account,” the governor added.