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In a contrary to the expectations that monetary arrangements will be eased for credit expansion, the Nepal Rastra Bank (NRB) has continued the existing direction of the monetary policy for the current fiscal year. In a mid-term review of the monetary policy announced on Friday, the central bank continued its approach of controlling credit expansion ignoring the increased calls for easing from the business community and asset market investors. With the review, the central bank has made it clear that economic risks still persist and that the easy availability of credit could again lead to a situation of a surge in imports and depletion of forex reserves.  With import restrictions lifted, ease of credit could again mount pressure on the external sector of the economy, according to the NRB. Thanks to the eight months-long import restrictions, the country's external sector has come back to normalcy with rising forex reserves and remittances and improving the balance of payment (BoP). NRB had announced a tighter monetary policy last July mainly due to the shaky situation of the country's external sector. The central bank in the half-yearly review of the monetary policy has provided some flexibility for small borrowers.  The central bank has extended the time for borrowers who are facing difficulty to pay loan installments and interest amounts on time due to a lack of cash flow. Banks have been barred from taking penalty interest if a borrower makes payment of loans along with the interest within a month after the expiry of the deadline till mid-June 2023. Likewise, the central bank, in order to facilitate the operation of small and medium enterprises and businesses, has also come up with a provision that loans up to Rs 20 million that has remained active until mid-January, 2023 can be restructured and tabulated within mid-July, 2023 16 after analyzing their cash flow and incomes. As NRB continued with its policies of monetary tightening, the private sector bodies have expressed displeasure over the mid-term review. In a public event held in Kathmandu on Friday, the President of the Federation of Nepalese Chambers of Commerce and Industry Shekhar Golchha said that the review of the monetary policy has not come as expected. "In order to boost the economy in the current state, it is necessary to make the economic activity sustainable, for that the interest rate had to be reduced. However, the central bank did not bring a concrete policy to reduce the borrowing rate,'' said Golchha. During the same event, FNCCI Vice President Anjan Shrestha, also termed the mid-term review of the monetary policy as 'insufficient'. However, Prakash Kumar Shrestha, Executive Director of NRB said that there is still a risk of imports surging following the lifting of restrictions. If that happens, it will again put pressure on the external sector. "Along with this, the average inflation is still above the target. Therefore, the NRB has not deviated from the direction of the monetary policy during the mid-term review," said Shrestha. NRB has kept the interest rate corridor unchanged. The cash reserve ratio (CRR), is unchanged at four percent while the statutory liquidity ratio (SLR) is also kept unchanged at 12 percent. The central bank has said it will introduce a policy of providing overnight liquidity facilities to banks and financial institutions at an interest rate of 7 percent. Earlier, banks and financial institutions were given overnight liquidity at 8.5 percent interest. "This will help to reduce the borrowing rates," said Shrestha. Similarly, a policy has been introduced to make the monitoring of the spread rate and the premium charged from borrowers effective. The spread rate, which is currently 4.4 percent, has been arranged to be reduced to 4.2 percent by mid-March and to 4 percent by next June through the first quarter review of monetary policy.

The Nepal Stock Exchange (NEPSE) plunged by 60. 77 points to close at 2,121.86 points on Sunday. Similarly, the sensitive index dropped by 10. 99 points to close at 404. 43 points. A total of 8,139,840 unit shares of 253 companies were traded for Rs 3. 04 billion. Meanwhile, Khaptad Laghubitta Bittiya Sanstha Limited was the top gainer today with its price surging by 59. 00 percent. Likewise, Ngadi Group Power Limited was the top loser with its price dropped by 20. 90 percent. At the end of the day, the total market capitalization stood at Rs 3. 06 trillion.

As the liquidity situation improved in the banking system with the surge in deposit collection and low demand for loans, the credit expansion of banks and financial institutions to the private sector jumped in the six months (mid-December to mid-January) of the current fiscal year. BFIs disbursed Rs 73 billion in loans in the first five months. The disbursement spiked in the sixth month (Poush) reaching Rs 64 billion. Banks disbursed only Rs 4.7 billion in the fifth month (Mangsir). Nepal Rastra Bank (NRB) data shows private sector lending of banks grew by Rs 137.33 billion in the first six months of FY 2022/23. “This suggests an improvement in the liquidity situation of the banking sector,” said a senior official of the NRB. “Interbank lending rate has also decreased to around four percent which is another indication of easing liquidity.” However, the credit expansion to the private sector during the first half of the current fiscal year is far less than what the BFIs lent during the same period last fiscal year. BFIs' lending to the private sector had grown by Rs 492.63 billion in the first six months of the previous fiscal. Along with the lending, deposit collection also surged in the Poush. Of the Rs 215.14 billion deposit growth in the first half of the current fiscal year, Rs 104 billion was recorded in Poush which also helped BFIs increase lending. Bankers, however, are not sure whether the rise in lending will continue in the coming months. “We are in a comfortable position in terms of investment-grade liquidity now and we are capable of lending to a certain extent. But we have not seen large-scale demand for credit in the last two weeks which gives to the suspicion that the loan demand seen in Poush may have fizzled out," the banker said. Businesspersons have been complaining about the weak market demand for goods and services in recent months which has forced them to reduce production. With industries running at low production capacity, the power demand from the industrial sector has also been decreasing, according to Nepal Electricity Authority. "If the government speeds up construction activities, demand for credit from the construction material industry may rise,” said the banker. However, the government is planning to cut the financing for construction projects in the wake of the resource crunch. The high-interest rates could also contribute to lower demand for loans, according to bankers. The private sector has been demanding that interest rates need to be lowered as the average interest rate of loans was 12.79 percent in January, which is the highest in the last two and half years. But BFIs are unlikely to reduce lending rates significantly because of the high cost of funds. The high cost of funds is because the majority of their source of funds is reliant on fixed deposits for which they have to pay higher interest. As of mid-January 2023, the share of fixed deposits in total deposits of banks and financial institutions stood at 60.4 percent. When it comes to categories of banks and financial institutions, finance companies have been heavily reliant on fixed deposits.  Finance companies and development banks are more reliant on fixed deposits. The share of fixed deposits in finance companies stood at 72.96 percent while the share in development banks stood at 69.33 percent and 58.22 percent in the case of commercial banks, during the first five months of this fiscal, according to NRB. “Liquidity in the financial system remains vulnerable as long as they reduce the composition of fixed deposits to around 40 percent,” another banker said. “It is because if a large institutional depositor withdraws money, investment-grade liquidity will decrease significantly.”

With the country grappling with the economic slowdown, the insurance business has taken a beating in the current fiscal year. Both life and non-life insurance business grew in single digits in the first half of the current fiscal year 2022/23. After growing in double digits in previous years, the insurance business (life and non-life) grew by a meager two percent in the first six months of the current fiscal year compared to a growth of 15 percent in the same period of the last fiscal year. The statistics of the Nepal Insurance Authority (NIA) show life and non-life companies collected insurance premiums totaling Rs 91.73 billion in the first half of FY 2022/23 which was Rs 90.12 billion in the corresponding period of the last fiscal year. Similarly, insurance premiums increased by only Rs 1.72 billion in this fiscal year. According to NIA, life insurance companies collected premiums amounting to Rs 71.65 billion in the first six months of the current fiscal year, while it was Rs 20.08 billion for non-life insurance companies. The premium collection of life insurance companies during the same period of the last fiscal stood at Rs 70.91 billion and non-life insurance companies at Rs 19.09 billion. According to NIA Executive Director Raju Raman Poudel, the ongoing economic slowdown has affected the insurance business. "Insurance business is facing challenges due to the high-interest rates, liquidity crunch, and rising inflation. These factors have reduced the common people's purchasing power," he said. Manoj Kumar Lal Karna, CEO of Union Life Insurance, is of the view that the growth of the insurance business has been held back in the current fiscal year due to the economic slowdown. "Currently, we are seeing surrender of life insurance policies in large numbers," he said. According to Karna, insurance premiums of large amounts are generally paid by borrowing money from banks. As banks are struggling with a liquidity crunch, borrowing from them has become difficult in this fiscal year and customers have not been able to pay the premiums. "As a result, there has been a big decline in the growth rate of the insurance business," he said. Insurers say that the rise in the non-renewal and surrendering of insurance policies is dragging the business down. The trend of surrendering the policy before the maturity period is increasing, according to insurance companies. The NIA data shows insurers have surrendered Rs 6.08 billion during this period. 43,715 insurance policies were surrendered in the last six months. Insurance Premium Collection