Monetary Policy dashes private sector's hopes

KUVERA CHALISE

KATHMANDU: The Monetary Policy for the current fiscal year though seems to have dashed the private sector’s hopes, it might boost the confidence of the depositors due to rise in deposit insurance amount.

“The private sector has been expecting to get some relief in the form of interest rates reduction due to Monetary Policy measures,” said Vice-president of the Federation of Nepalese Chambers of Commerce and Industry Pashupati Muraraka, after the central bank governor released the Monetary Policy 2012-13 here today. But the central bank increased the Cash Reserve Ratio to six per cent for commercial banks, 5.5 per cent for development banks and five per cent for finance companies to mop up excess liquidity in the financial system. “The increase in CRR will increase cost of fund of the banks and financial institutions,” said Vice-president of Nepal Bankers Association Rajan Singh Bhandari. Last fiscal year’s Monetary Policy had reduced CRR to five per cent to deal with liquidity crunch in the financial system.

“Increase in CRR will be effective in absorbing some of the excess liquidity, preventing any negative push towards inflation in the absence of effective channel to mobilise excess funds,” said economist Bishwambher Pyakuryal, who has also served as the central bank’s board member.

However, the private sector fears that the interest rate — that has increased the cost of doing business — might not come down as expected due to excess liquidity in the financial system because of the hike in CRR.

“At a time when there is no demand for the credit due to high interest rates, the Monetary Policy has also prescribed deposit insurance of up to Rs 3 lakh from the current Rs 2 lakh that will again increase the cost of fund of the banks and financial institutions as the Deposit and Credit Guarantee Corporation has not yet reduced the deposit insurance premium,” said Nepal Finance Companies Association Rajendra Man Shakya. “The increase in deposit insurance will boost the confidence of depositors on the financial system but at the same time the banks and financial institutions’ expenses will rise,” he said, asking NRB to help reduce premium rate.

“Without expanding the area — by developing forward and backward chain — with a long-term vision, the directed lending will create over supply and again add pressure on the financial sector,” Pyakuryal added.

After the NRB Act 2002 gave the central bank an autonomous status, it started to formulate sound comprehensive monetary policy and strategies to stabilise financial sector, inject money for the economy that could help grow as targeted by the fiscal policy and check inflation. But it is the second time that NRB has brought monetary policy in the absence of full-fledged budget.