Governor Adhikari to the Finance Committee, Loan Disbursement has Become Easier as Interest Rates are Falling, Brief note of 25 points Said by Governor

Kathmandu : Central Bank has submitted a 25-points brief note to the Federal Parliament House of Representatives, Finance Committee.

In a 25-points brief note, he has also mentioned that since the interest rate has further decreased, the average base rate of commercial banks has dropped to 9.94 percent in October 2023 from 10.34 percent, a single digit.

Economic situation:

1. The budget for the financial year 2023/24 has set an economic growth target of 6 percent. It can be estimated that the economic growth of 4 to 5 percent in the current year is due to the fact that tourist arrivals and remittances have increased significantly, interest rates are decreasing and credit flows have started to increase. After COVID, a large number of young people went abroad for foreign employment and studies, while domestic demand has decreased.

However, the recent improvement in tourism arrivals, significant remittance inflow, improvement in liquidity and declining interest rates seem to have a positive effect on the economic growth rate.

 A state of inflation:

2. Inflation is still high. The price increase of 2023 October is 7.5 percent, which is 1 percentage point lower than October 2022, but slightly higher than the target of 6.5 percent set by the monetary policy.

The overall price increase is high, especially due to the increase in the prices of food and beverages. In October 2023, the price increase of food and beverages was 8.4 percent and the price increase of non-food and service group was 6.8 percent. Consumer price inflation is expected to improve due to declining price inflation in India and improvement in wholesale price inflation in Nepal.

2023 increased by 1.7 percent till the end of October, but it decreased again by 3.8 percent in October/November. Trade deficit has also decreased by 33 percent. As of October 2023, remittance inflows have increased by 30 percent, resulting in a surplus of 59 billion in the current account. In addition to this, as the inflow of foreign investment has also increased compared to last year, the post-exploration savings has also been maintained at 99 billion till 2023 October.

As of October 2022, as much as 8 crores of foreign investment has been received, 3 billion 38 crores have been received till October of the current year.

6. Foreign exchange reserves increased along with commodity exchange savings and reached 16.143 billion (12.3 billion US dollars) in October 2023. The reserve is enough to cover 10.3 months of import of services.
7. Tourist arrivals have increased by 71 percent in the 10 months of 2023 compared to the 10 months of 2022. The number of people going for foreign employment has increased in the previous two financial years, but it has decreased by 21 percent in the three months of the current financial year.
8. Along with the improvement of the external sector, the liquidity of the banking sector has also improved. Expanded money supply increased by 53 percent in October 2022 and increased by 14 percent in October 2023. This shows that monetary expansion has increased at a high rate.

 Deposits of banks and financial institutions have increased by 82 percent last year and have increased by 14.9 percent this year. Credit expansion is also improving. The credit flowed from banks and financial institutions to the private sector increased by 109 billion during the current fiscal year compared to 59 billion in the three months of the previous financial year. Due to the improvement in liquidity and decreasing interest rates, credit flow is expected to increase further.

 7. Short-term and long-term interest rates are falling due to the flexible course of monetary policy and the improvement in liquidity. In October 2022, the weighted average interest rate of 91-day treasury bills was 10.14 percent, while in October 2023, it was 494 percent. The weighted average interest rate of 91-day treasury bills further decreased to 2.62 percent on 18th November 2023.

The difference between banks and financial institutions is that the weighted average interest rate of bank transactions was 8.51 percent in October 2022 and 2.26 percent in October 2023. Such differential bank interest rate further decreased and remained at 1.01 percent on 18th November 2023.

8. In October of the previous financial year, the average base rate of commercial banks was 10.34 percent, but in October 2023, it has dropped to 9.94 percent, a single digit. The weighted average loan interest rate of commercial banks reached 13.03 percent in January 2022, but fell to 121 percent in October 2023. Banks and financial institutions are reducing the interest rate of deposits, so the interest rate of loans is going to decrease further.

Arrangement and implementation of monetary policy:

Regulatory policies and arrangements after the release of the monetary policy of the current financial year through the circular dated 2023 April 12

1. 100% risk weight has been maintained on personal hire purchase and personal auto loan up to 25 lakhs.
2. The risk weight has been maintained at 100 percent for loans up to 50 lakhs that are secured by shares.
3. For land acquisition and development purposes, the risk weight has been maintained at 100 percent in loans to licensed organizations and projects registered by the Government of Nepal.
4. A maximum of 70 percent of residential home loans up to 20 million for people buying or building a house for the first time.
5. In view of the internal and external economic scenario, the policy rate has been reduced by 50 basis points to 6.5 percent. The bank rate has been kept unchanged at 75 percent and the deposit collection rate has been reduced from 5.5 percent to 4.5 percent.

Arrangements facilitated vide circular dated 18 June 2023:

6. Banks and financial institutions invest in projects affected by natural and divine disasters such as floods, landslides, earthquakes, etc. Existing loans and loans up to 50 million in all other sectors are required by analyzing the cash flow and income of industrialists and businesses at the request of the borrower.

And on the basis of reasonableness, at least 10 percent of the interest to be paid should be collected and subject to the following conditions, it is arranged to reschedule and restructure the loan.

7. The minimum loan loss provision for good loans has been reduced from 1305 to 1255.
8. The maximum single customer credit limit for margin-type loans flowing into share securities from any one or all licensed institutions has been fixed at 150 million. For institutional investors established with the main purpose of investing in the securities market, the maximum limit of such loans has been fixed at 20 crores.
9. In order to protect the real estate loan and its mortgage, it is arranged that the ratio between the real estate loan and the loan should be maintained at a maximum of 50 percent. However, in the case of private residential house loans and loans granted for residential house construction to company projects approved by the Government of Nepal that are operating house construction business as per the rules, this ratio can be maintained up to 60 percent maximum.
10. When determining the interest rate of loans and mortgages, it is arranged that the difference between the interest rates of loans and mortgages of the same nature cannot be more than 2 percentage points.

Vide circular dated 2023 August 13:

11. It has been arranged that only 125 percent of the risk load will be maintained in the personal hire purchase personal auto loan of more than 25 lakhs.

Vide circular dated 2023 August 13.

12. Before including the guarantor in the blacklist, the mortgage kept by the debtor as security has to be auctioned and recovered. If the recovery from such security is not sufficient and the loan amount of the bank remains, the guarantor should be given a period of 90 days for its payment. Only after the notification period, the guarantor should be included in the blacklist.
13. It is not mandatory to blacklist other firms/companies belonging to the same JV just because a firm/company belonging to the JV is blacklisted.

Latest financial status of banks and financial institutions :

1. During the implementation of the monetary policy, the financial situation of the banks and financial institutions is as follows due to the additional facilitation arrangements made for the banks and financial institutions.
2. Deposits in banks and financial institutions increased by about 50 billion from July 1st to November 15th of the last financial year, and increased by about 209 billion during the same period of this financial year.
3. From July 1st to December 15th of the last financial year, loans in banks and financial institutions increased by about 60 billion, while in the same period of this financial year, loans increased by about 125 billion. On 15 November 2022, the loan deposit ratio of commercial banks was 86.99 percent, while on 15 November 2023, the ratio was 80.37 percent.
4. Also, the net liquidity ratio of banks and financial institutions was 2412 percent on December 15, 2022, while on December 15, 2022, the ratio was 29.64 percent.