23rd May 2023, Kathmandu
President of Nepal Bankers Association Sunil KC has said that the interest rate will further decrease.
President KC said that this decision was taken by the meeting of Nepal Bankers, the umbrella organization of banks held today. “Liquidity is getting easier, interest rates will decrease further,” he said.
Similarly, KC said that credit expansion has decreased as the capital adequacy ratio of banks and financial institutions is getting tighter. “As the costs of banks and financial institutions increase, the profit is also decreasing,” he said.
He said that it is hoped that deposits will increase as government spending increases. He says that liquidity is easy and the rate of deposits has increased compared to loans. Bad loans are also expected to decrease now, it was 3.03 in the third quarter, he said.
He predicts that the current capital loan policy will slow credit expansion in the coming year and government spending will not increase and economic growth will slow down.
To ease liquidity in Nepal, the government can implement several policy measures. Here are some possible steps that can be taken:
1. Monetary Policy Adjustments
The central bank of Nepal can adopt a more accommodative monetary policy by reducing interest rates. Lowering the policy rates, such as the repo rate and the bank rate, can encourage commercial banks to borrow from the central bank at lower costs. This, in turn, can enable banks to offer loans and credit facilities at lower interest rates, stimulating borrowing and investment.
2. Reserve Requirement Ratio
The central bank can consider reducing the reserve requirement ratio (RRR). RRR is the proportion of deposits that banks are required to keep as reserves with the central bank. By decreasing the RRR, banks would have more funds available to lend to businesses and individuals, increasing liquidity in the economy.
3. Open Market Operations (OMOs):
The central bank can conduct open market operations by purchasing government securities or other financial instruments from the market. This injects money into the banking system, increasing liquidity and stimulating lending.
4. Targeted Liquidity Programs:
The government can introduce targeted liquidity programs to address specific sectors or industries facing liquidity constraints. This can involve providing subsidized loans or credit guarantees to businesses operating in those sectors. These measures can help alleviate liquidity issues and support economic activities in critical areas.
5. Enhancing Credit Facilities:
The government can collaborate with financial institutions to enhance credit facilities for small and medium-sized enterprises (SMEs) and startups. This can be achieved by establishing dedicated funds or guarantee programs that facilitate easier access to credit, promoting entrepreneurship, and fostering economic growth.
6. Strengthening Financial Inclusion:
Promoting financial inclusion can enhance liquidity in the economy. The government can encourage banks and financial institutions to expand their outreach to underserved areas and population segments. This can involve the establishment of mobile banking services, agent banking networks, and simplified account opening procedures, enabling more people to participate in the formal financial system.
7. Support for Non-Banking Financial Institutions:
The government can extend support to non-banking financial institutions (NBFI) such as microfinance institutions, cooperatives, and development banks. These institutions play a crucial role in providing financial services to marginalized communities and rural areas. Support can be in the form of refinancing facilities, regulatory relaxation, or capacity-building programs.
8. Promoting Digital Payments:
Encouraging the adoption of digital payment systems can enhance liquidity and transparency in the economy. The government can incentivize digital transactions through reduced transaction fees, cashback schemes, or tax benefits. Promoting digital payments can also reduce the demand for physical cash, improving liquidity in the banking system.
9. Strengthening Financial Regulations:
Ensuring robust financial regulations and supervision is essential to maintain stability and enhance liquidity. The government should regularly assess the regulatory framework and make necessary adjustments to prevent excessive risk-taking, promote responsible lending practices, and safeguard the overall financial system.
10. Public Awareness and Education:
The government can conduct public awareness campaigns to educate individuals and businesses about the importance of financial planning, prudent borrowing, and the availability of various financial services. Improved financial literacy can empower people to make informed decisions and better manage their liquidity needs.
It’s important to note that the implementation of these policies requires coordination between the government, the central bank, and other relevant stakeholders. Additionally, the effectiveness of these measures should be continuously evaluated, and adjustments should be made based on the evolving economic conditions in Nepal.