Mid-term review of monetary policy: NRB to get tough on unproductive sector lending

KATHMANDU, MAR 04 -

Home loans to be eased,

Margin lending provision to be relaxed,

Unproductive sector lending to be controlled,

Procedures of refinancing to be eased,

Inflation target upped

One has to make a large down payment for purchasing a motorcycle or four-wheeler henceforth.

In a bid to discourage banks from lending in unproductive sectors, the mid-term review of the monetary policy has provisioned that people willing to invest in such sectors have to manage a huge portion of the fund on their own. The central bank will also be stringent in the provisioning of such loans.

In the realty sector, banks and financial institutions (BFIs) can lend only up to 60 percent of the average collateral value. In attractive projects, banks have been lending up to 80 percent of the total project cost.

The central bank, in its mid-term review of the monetary policy for current fiscal year, said loans and their quality will be seriously affected if banks lend in unstable sectors and sectors having a very little value addition. “This may lead to instability in the financial sector and affect the fiscal stability, as the country will be marred by low investment and high cost,” said the monetary policy review made public on Thursday.

However, bankers say that sectors such as hire purchase may be affected if the central bank imposes condition that BFIs cannot lend more than 50 percent of the project value. “It will be better if NRB keeps it up to 70 percent,” said Sashin Joshi, CEO of NIC Bank.

As the review has stated that BFIs will have to make more provisioning of such lending, a senior NRB official said the central bank may direct BFIs to make provisioning of loans even before the expiration of the repayment deadline. International Monetary Fund has also been suggesting the NRB for adopting similar measures.

As per the existing provision, BFIs will have to make 1 percent provisioning of good loans. If they fail to recover loans within three months after the expiration of the repayment deadline, they should make provisioning of 25 percent of the loans. In the event of BFIs’ failure in recovering loans within six months after the running out of the repayment deadline, they should make provisioning of 50 percent of the loans and 100 percent if they fail to recover even within one year after the ending of the deadline.

In order to the encourage lending in productive sectors, the central bank will ease the procedures of re-financing, given that banks are not taking re-finance from the central bank to lend to productive sectors. “We are ready to extend the repayment period of re-financing through a rollover, even though the NRB Act allows us to give refinancing only for six months,” said NRB Governor Yubaraj Khatiwada. At a time when the manufacturing and export sectors are suffering from higher interest rate on lending, the central bank has opened the window of refinancing, under which these sectors can get loan at 10 percent interest rate.

The central bank will also ease home loans. “A directive with an easier provision for getting home loans will be issued soon,” said Khatiwada.

The central bank announced that it will give certain relief to the stock market by easing the margin call related provision, repayment deadline of loans given against shares as collateral and renewal of such loans. Banks have been demanding that the central bank should allow them to renew good loans. As per the existing

provision, banks can renew such loans only after borrowers pay 25 percent of their loans in addition to the interest.

The NRB’s commitment to give some relaxation to the stock market and realty sector has invited mixed reactions from the banking sector. Nepal Bankers’ Association President Ashok Rana welcomed the NRB move to relax these sectors, saying that the central bank addressed their concerns. “The NRB telling us to reduce the cost of funds and increase deposits is good,” said Rana. Governor Khatiwada had asked bankers to go for merger to reduce operational cost. He was also critical of bankers for keeping interest spread rate higher by charging higher interest to borrowers against depositors.

However, bankers are not happy with the governor’s comments. “Talking about increased spread rate when the rate is decreasing is a mistake on the part of NRB,” said a banker.

The mid-term review has the made an upward revision of the inflation to 9 percent from 7 percent.

Posted on: 2011-03-04 09:11
PRITHVI MAN SHRESTHA, http://www.ekantipur.com/2011/03/04/business/mid-term-review-of-monetary-policy-nrb-to-get-tough-on-unproductive-sector-lending/330439.html