The Real Test of Monetary Policy: Productive Capital, Not Interest Rates

As Nepal Rastra Bank prepares the monetary policy for the upcoming fiscal year, there is a risk that the economic debate will once again be reduced to whether interest rates should be lowered. But the present problem is not merely the cost of money. It is the failure of available capital to reach production, employment and enterprise. Despite adequate liquidity in the banking system and comparatively low interest rates, credit to the private sector has not expanded at the expected pace. This shows that the mechanism through which monetary policy reaches the real economy remains weak.

Banks having money and the economy gaining access to capital are not the same thing. Unless investors have confidence in the market, policy stability and investment security, cheaper credit alone will not create new industries. At the same time, pressure on banks’ core capital, rising non-performing loans, accumulated seized assets and rigid loan-classification rules have limited their actual lending capacity.

The upcoming monetary policy must therefore move beyond routine interest-rate adjustments and provide a clear roadmap for a second phase of financial reform.

The first priority should be the management of non-performing and seized assets held by banks. When billions of rupees worth of land, buildings and other properties remain trapped on bank balance sheets, that capital stays outside the productive economy. Such assets should be returned to economic use through transparent asset-management companies, sales, rentals and leasing arrangements. However, the process must not become a mechanism through which politically connected groups acquire valuable assets at discounted prices.

Second, a clear distinction must be made between businesses facing genuine economic hardship and borrowers who deliberately avoid repayment. Manufacturing, tourism, construction and seasonal enterprises do not have the same cash-flow patterns. Applying a single working-capital standard to every sector can push even viable firms into distress. Time-bound restructuring and rescheduling facilities should be available to productive businesses. But financial discipline must not be weakened, bad loans must not be concealed and politically motivated loan waivers must not be encouraged.

Third, credit should be redirected from imports, real estate and short-term trading towards agro-processing, industries based on domestic raw materials, energy, tourism, information technology, exports and import substitution. Support should not simply mean distributing cheaper loans. It should include risk-sharing mechanisms, credit guarantees, long-term financing, grace periods and project-quality-based financial instruments.

Artificially pushing deposit rates even lower is not a solution either. It could penalise savers, drive money into informal channels and increase the risk of capital flight. Nepal Rastra Bank must preserve financial stability while improving banks’ capital strength, governance and credit-assessment systems.

The country does not need paper liquidity sitting idle in banks. It needs capital that can operate factories, expand enterprises and create jobs. The success of monetary policy should not be measured by how far the policy rate falls, but by how many industries begin operating, how many jobs are created, how much exports increase and how securely citizens’ savings are protected.

The new monetary policy must not be treated as a separate exercise to rescue banks or provide relief to businesses. It should become a shared national commitment to revive Nepal’s productive capacity.