Monetary Policy and Central Banking

Monetary policy and central banking
Central banks play an important role in ensuring economic and financial

stability. They conduct monetary policies to achieve low and stable inflation.
Despite the global financial crisis, central banks have expanded their tools to
address financial stability risks and manage volatile exchange rates. In the
Covid-19 pandemic, central banks appear to have used traditional and
unconventional tools to simplify monetary policies, facilitate liquidity in major
financial markets and maintain credit flows. Central banks need a clear policy
framework to achieve their objectives.
Central banks generally conduct monetary policy by adjusting money supply

through the open market. For example, the central bank may reduce the
amount of money it sells by selling government bonds under a "sell and
repurchase" agreement, thus taking money from commercial banks. The
purpose of such open market operations is to raise short-term interest rates,
which in turn affect long-term rates and overall economic activity. In many
countries, especially in low-income countries, the monetary transmission
mechanism is not as effective as it is in advanced economies. Before moving
to monetary inflation targets, countries need to develop frameworks to enable
their central banks to target short-term interest rates.
MAJOR HIGHLIGHTS
 Economic Growth rate : 7 %

 Consumer inflation : no higher than 7%
 Repo Rate reduced 3% (3.5% last year)
 Long-term Repo service to be made available to improve much-needed
liquidity for financial rehabilitation.
 Mandatory Cash ratio 3% to be maintained by BFIs
 Statutory Liquidity Ratio : 10-8-7%
o Commercial Banks : 10%
o Development Banks: 8%
o Finance Companies: 7%
 The lender of last resort rate : 5%.
 Commercial banks to issue
o at least 15% of their loans in the agriculture sector by 2080 Ashadh end.
o 10% to the energy sector of total loans by 2081 Ashadh end.
 Commercial Banks experienced in the energy sector will be allowed to issue
Energy Bonds.
 Commercial Banks can issue energy bond refinancing loan facility for SMEs at
2%
 Credit to core capital plus deposit (CCD) Ratio has been increased
from 80% to 85%.
o It means banks can issue more loans and advances against deposits
as 5% lesser is required to be set aside as a reserve to maintain liquidity.
 Agriculture Development Bank will be established as a “Lead Bank” in the
agriculture sector. It can also issue Agriculture Bonds to ensure long-term
availability of resources.
 Inter-bank transactions of Agriculture Credit Swaps will be further simplified.
 The distribution of cash dividend for BFIs with net profit less than 5% will be
forbidden.
 In case of BFIs with a net profit higher than 5% of their paid-up capital will be
allowed to distribute 30% of dividends as cash dividend in maximum.
o However, companies that fulfills the 5% requirement still can’t distribute
cash dividend that amounts to a larger sum than their Deposit Weighted
Average maintained in Ashadh 2077.
 No licenses to be issued for new finance companies because the microfinance
sector in Nepal is already saturated. Also, any microfinance license under the
process of issuance will be discarded.
 Provisions for merger and acquisition of BFIs
The positive aspects of the policy

The monetary policy prioritizes agriculture, energy, and small and medium-sized enterprises. For the first
time in the history of monetary policy, the central bank has prioritized cottage and small industries. These
crisis hit businesses been provided with relief packages and policies including the extension of loan
repayment deadline, refinancing, and targeted lending.
The borrower-friendly monetary policy has addressed the needs of the business community by ensuring
increased liquidity and easy access to credit. The policy largely mentions extension in loan repayment,
grace period extension, and refinancing. The tourism sector that has been drastically affected by the
pandemic is eligible for facilities announced under the recovery plan which include easy loans from BFIs,
relief credit, and refinance.
Mergers and acquisitions have been promoted in the banking sector. The policy lays down some
incentives to facilitate mergers. Likewise, the issuance of new licenses for microfinance companies has
been forbidden in the overly saturated sector, which is commendable as it would ensure healthy
competition and a controlled financial system in the nation.
The monetary policy has also relaxed the provisions regarding provisioning in case of loan extensions for
the virus affected sector. This comes as a huge relief to the banking sector. The central bank has also
opened doors for reviving a business through new investments by way of private equity funds, venture
capital, debt-equity conversion, and special purpose vehicles. Overall, the monetary policy has introduced
measures that are favorable to doing business despite the effect of pandemic and lockdown.
What could have been done better and the road ahead
The policy aims to achieve an annual growth rate of 7 percent, which seems fairly unrealistic given the
impact of the pandemic and the nation-wide lockdown. Moreover, the monetary policy has failed to
address the need for an exit policy through a waiver of interest. It fails to consider that certain businesses
are in no position to revive. The policy is also ambiguous regarding the amount of the refinancing
package.
The policies and provisions laid out in the new monetary policy sound promising, but the real struggle
would be its fast-tracked implementation. The policy looks good on paper, but the question regarding its
implementation remains. To make the policy successful its implementation and careful monitoring of
execution are equally important. Looking forward, the central bank should focus on speedy
implementation of the monetary policy which will in return ensure economic revival and stability.

Monetary Policy and Central Banking

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Monetary Policy and Central Banking

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Monetary policy and central banking

Central banks play an important role in ensuring economic and financial

Central banks generally conduct monetary policy by adjusting money supply

 Economic Growth rate : 7 %

The positive aspects of the policy

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