Monetary Policy 2011-12: NRB likely to reduce CRR by 0.5 percent


With the banking sector facing a protracted liquidity crunch, the upcoming monetary policy is likely to reduce the cash reserve ratio (CRR) by 0.5 percent to 5 percent. The Nepal Rastra Bank (NRB) plans to present the monetary policy this week.

The central bank board on Monday discussed the proposal on CRR prepared by its research department. “The board has asked the department to ascertain the exact additional liquidity the banking sector will get after CRR reduction,” said an NRB source.

CRR is the minimum reserve of deposits that commercial banks must hold. CRR is usually lowered during liquidity shortage in banks and hiked when there is enough liquidity. Currently, commercial banks are required to maintain CRR at 5.5 percent. If the ratio is reduced by 0.5 percent, the banking sector will get additional liquidity of Rs 3 billion.

The central bank has also planned to maintain positive balance of payment (BoP) at Rs 3 billion. Although the NRB projected a BoP surplus of Rs 9 billion last fiscal year, it could not be realised. As of the first 10 months of the last fiscal year, the country witnessed a BoP deficit of Rs 11.67 billion. The International Monetary Fund had provided $42 million under its Rapid Credit Facility, an urgent loan facility to address BoP deficit, last year. Development Bankers’ Association had been demanding the central bank to reduce CRR. “We had asked NRB to reduce CRR through the monetary policy,” said Manoj Goyal, president of Development Bankers’ Association. “It will give huge relief to the market.”

However, some bankers expressed different view. NIC Bank Chief Executive Officer Sashin Joshi said reducing CRR alone is not a solution to the current problem. “NRB must ensure early liquidity injection for those facing actuate liquidity crunch,” he said. “The central bank must bring policies that would help B and C class financial institutions.”

As India is increasing CRR, it will not be easy for NRB to reduce it here, according to Parsuram Kunwar Chhetry, CEO of Bank of Asia. “It is not that a reduction in CRR will make available enough resources for investment,” he said.

The NRB source said the monetary policy is less likely to announce additional facilities for BFIs going for mergers, as NRB has already given required facilities through merger guidelines. The guidelines have pledged relaxations in provisions on capital structure, shareholding limit for promoters, credit-deposit ratio, borrowings limit for promoters and deprived sector lending, among others.

The monetary policy is also likely to make the same prediction of the economic growth and inflation at 5 percent and 7 percent, respectively, that the budget has done, according to the source.

BFIs get yet another relaxation

The Nepal Rastra Bank (NRB) on Tuesday allowed banks and financial institutions (BFIs) to treat the repayments received until mid-August as those collected before mid-July.

Given the real estate traders and bankers demanding extension of the repayment period beyond mid-July, the central bank made such a provision. It is expected to save BFIs from making loan loss provision of unpaid loans and maintain higher profit.

NRB Spokesperson Bhaskarmani Gyawali said the central bank took such a decision as businessmen complained that they were facing difficulties in repaying loans and bankers also supported them. “NRB offered the relaxation as the present situation is not normal,” said Gyawali.

Earlier, the central bank had allowed BFIs to renew loans for one more year if the loanee pays all outstanding interests. It had also increased the ceiling of home loans to Rs 8 million from earlier Rs 6 million which will not be categorised as realty loans.

The new NRB measures have excited bankers and realty traders. Nepal Bankers’ Association Vice President Rajan Singh Bhandari said the relaxation was necessary. “It will pile moral pressure on loanees to pay loans,” he said.

Nepal Land and Housing Developers’ Association General Secretary Min Man Shrestha also lauded the NRB move, saying it will save many borrowers from becoming defaulters. “One month is enough for loanees, as they may manage the money within a week too,” he said. The banking sector is facing difficulty to get repayment, especially from the realty sector.