FNCCI submits comprehensive Monetary Policy reform proposal for FY 2083/84 to parliament finance committee

KATHMANDU: The Federation of Nepalese Chambers of Commerce and Industry (FNCCI) has submitted an extensive set of monetary policy recommendations for Fiscal Year 2083/84 to the Finance Committee of the Federal Parliament, urging structural reforms in Nepal’s banking sector, credit system, and investment environment to revive sluggish domestic economic activity.

The FNCCI proposal highlights that while Nepal’s external economic indicators remain strong, the domestic economy continues to face pressure due to weak investment demand, declining credit expansion, and large volumes of idle liquidity in the banking system.

Strong External Sector Performance, Weak Domestic Economic Activity

FNCCI noted that Nepal’s foreign exchange reserves have increased by 38.3 percent, providing import coverage of 22.6 months of goods and 19.2 months of goods and services.

The current account surplus reached Rs 729 billion, while the balance of payments surplus stood at Rs 863.56 billion, showing significant external stability improvement compared to previous fiscal years.

However, the federation warned that the domestic economy remains under strain, with weak industrial activity and low private sector confidence.

Private sector credit growth has slowed to 5.7 percent from 7.3 percent, despite a sharp decline in lending rates. The banking system is currently holding more than Rs 14 trillion in idle investable liquidity, reflecting weak credit demand.

In the last 10 months, over Rs 37 trillion in liquidity absorption operations have been carried out, indicating excess liquidity in the financial system.

Investment Demand, Not Interest Rate, Identified as Core Challenge

FNCCI stated that Nepal’s primary economic challenge is no longer high interest rates but a lack of investment demand and weak capital mobilization.

The federation highlighted that:

• Nepal Rastra Bank has already reduced policy rates, SDF and SLF rates
• Deposit rates have reached historic lows
• Average lending rates have dropped to around 6.9 percent
• Despite this, credit expansion remains weak

FNCCI emphasized that the issue lies in the weak transmission of monetary policy into the real economy, preventing liquidity from flowing into productive sectors.

Banking Sector Constraints and Capital Adequacy Pressure

FNCCI pointed out that many banks and financial institutions are operating near the minimum capital adequacy ratio (CAR) limits, restricting their ability to expand lending.

The federation stated that even with available liquidity, banks are unable to aggressively increase credit due to:

• Regulatory capital constraints
• Limited provisioning flexibility
• Tight risk-weighted asset requirements

FNCCI urged the Nepal Rastra Bank to introduce capital relief measures, provisioning reforms, and regulatory flexibility to unlock credit growth.

Idle Bank Assets and Proposal for Asset Management Company

The federation has proposed the immediate establishment of a National Asset Management Company (AMC) to manage non-performing and non-banking assets.

According to FNCCI, banks currently hold large volumes of seized and idle assets, which are not contributing to economic productivity.

The AMC is expected to:

• Manage non-performing loans
• Dispose or lease seized assets
• Reintroduce idle capital into productive circulation

Working Capital Loan Policy Reform Demanded

FNCCI has called for sector-specific flexibility in working capital loans, arguing that uniform policies are not suitable for diverse industries.

Key recommendations include:

• Flexible working capital loan structures based on business nature
• Restoration of overdraft facilities up to 20 percent of approved limits
• Revision of working capital loan ratios for different industries
• Greater autonomy for banks and borrowers in structuring loans

Export Sector and LDC Graduation Risk Concerns

The federation warned that Nepal’s upcoming graduation from Least Developed Country (LDC) status will result in the loss of key trade preferences.

FNCCI has called for targeted support measures, including:

• Concessional refinancing for export-oriented industries
• Risk-sharing credit facilities
• Special support for SMEs, domestic industries, and women entrepreneurs
• Strengthening export competitiveness during transition

Structural Financial Reform Agenda Proposed

FNCCI emphasized that Nepal requires a Financial Sector Reform 2.0 framework, beyond interest rate adjustments.

The proposed reforms include:

• Banking sector recapitalization
• Non-performing asset resolution mechanisms
• Development of long-term capital markets
• Risk-sharing financial instruments
• Targeted credit expansion for productive sectors

Credit Classification, NPA and Risk Provisioning Reforms

FNCCI has recommended significant revisions in loan classification and provisioning rules, including:

• Relaxation of NPA classification timelines
• Faster reclassification of repaid loans
• Revised provisioning structure based on overdue duration
• More flexible treatment of restructuring and rescheduling cases

It also proposed easing loan-to-value (LTV) restrictions in real estate up to 80 percent of fair market value.

Digital Banking and Fintech Expansion Agenda

FNCCI has called for modernization of Nepal’s financial ecosystem through:

• Reduction of QR, mobile banking, and digital transaction fees
• Cross-border digital payment integration with India
• Increased Indian card usage limit from Rs 1 lakh to Rs 3 lakh per month
• Establishment of a regulated Fintech Marketplace under Nepal Rastra Bank supervision

Interest Rate Structure and Banking Efficiency Reforms

The federation has proposed:

• Revision of base rate calculation methodology
• Reduction of bank spread rate below 4 percent
• Improved coordination between policy rate, interbank rate, and lending rates
• Strengthening of monetary policy transmission mechanisms

Trade Finance, Credit Expansion and Startup Support

FNCCI also proposed reforms in trade finance and innovation financing, including:

• Reduction of advance payment requirements for imports
• Expansion of credit rating thresholds for large loans
• Improved trade finance instruments
• Establishment of a dedicated Startup and Innovation Fund
• Collateral-free or partially secured loans for technology-driven enterprises

Budget Implementation and Financial Innovation Instruments

The federation stressed the need for timely implementation of budget announcements, including:

• Establishment of Asset Management Company (AMC)
• Issuance of diaspora bonds and green energy bonds
• Development of offshore bond instruments in Nepali currency
• Creation of sovereign wealth-type investment funds
• Introduction of hedging instruments for foreign exchange risk management

Private Sector Position on Economic Reform

FNCCI reiterated that the private sector is committed to:

• Expansion of formal economic activity
• Promotion of digital financial systems
• Strengthening financial transparency
• Encouraging responsible borrowing practices

The federation stressed that economic reform is a shared responsibility between government and private sector institutions.