Some say Nepal's economy is on the verge of collapse and Nepal is heading towards becoming a failed economy, while others say it's an exaggeration. What's your view?

I think both are extreme viewpoints. Actually, the Nepali economy is not doing well compared to our neighbouring countries. That doesn't necessarily mean we are going to collapse. We have downward risk such as being overtly dependent on agriculture and remittance. Both of them have either climatic socks or say international market socks. So, we are vulnerable.

The fact is :Nepali economy will run at a very low equilibrium, with low growth, low employment, and low forex reserves. If you have a good economic environment across the political spectrum, we could have high growth and accordingly high employment and high income scenario. People are expecting better results. Perhaps out of frustration, that's why they like to comment on the negative extremes.
 

Why have people's expectations grown so unrealistically ?

China is growing at 9-10 per cent and amidst global recession. India is growing at 8 per cent and Bihar is registering a double digit growth. We raise the people's expectations saying that the new Nepal will have a double digit growth. And then we end up with less than a fraction of that when our per capita income happens to be the lowest in South Asia. If we compare ourselves with Bhutan, it's per capita income is in excess of US $ 2000 and there is pressure building up to upgrade Bhutan from its current LDC status. People are bound to compare and voice their frustration. But we must also look at our own history; we have been growing at 5 per cent on an average for the last 25-30 years and now we are growing at the rate of 4 per cent. The frustration is coming mostly from looking at the progress made by other countries in the region. I would say that we could do much better if we had political stability.

Why haven't our macroeconomic indicators improved even after the peace deal?

Well, macroeconomic indicators o inflation, growth, trade and balance of payment etc.help to create an enabling environment for investment. We could not do well in the balance of payment from last year and we had huge deficit during the first six months. We managed to recover in the year end somewhat. We have a double digit inflation making people speculate towards the real assets rather than focussing on the financial side. So, it has created some distortions in the economy but that is not the story behind weak economic performance. Actually, the structural weaknesses like resumption of power outage of the economy are important to address. You cannot grow power intensive manufacturing or power intensive services when you have heavy power shortage. You cannot have labour intensive industry simply because the trade union is stronger and perhaps the political parties themselves don't have control over their own trade unions. You can see the anarchy in the labour market. Everybody is avoiding two types of industries or services--labour and power intensive ones. You are back to being dependent on agriculture which again we are left at the mercy of rain. Only if we could sort out these issues, then we can be hopeful over the state of the economy.

A few months ago, the central bank tried to restrict the banking sector's investment in the real estate and housing. Is the progress as expected of it?

Well, we have not stopped it. We have only set a limits where the investment in the real estate in the true sense of the world, should not exceed 10 per cent of a bank's lending portfolio. If some banks have invested say five percent, they still have room but if a bank has already lent 25per cent in this sector alone, it has to bring down the figure. So, industry wise there is still some space. And now if banks collect more deposits they can create more room for the real estate financing too. Also, we have separated housing from the real estate business. Housing for medium class families or low income group families is a necessity because people need to have shelters. So, we are still encouraging housing. Regarding the result, the speculative moves in the land deals have almost stopped. Coming to the financial repercussion, people have apprehension that the borrowers might not be able to repay the loan. If the banks have some more deposits collected, they can still roll over your credit. So that way we are not even asking everybody to collapse.
 

Why do you think there has been a sort of organised protest against NRB's recent guidelines aimed at limiting the salaries of Bank CEOs? Don't you think it's for a bank to decide the salary for its top executive?

On our part, we only want the salaries of the CEOs managed as the component of the wider financial governance. We have seen that the global financial system collapsed because of the perverse benefit structure that was embedded in the CEOs salaries and incentives. There is no point in the CEOs earning huge incentives by undertaking risky ventures to maximise profits and then leave the industry and move to a different occupation. This has often led to the banks landing in financial troubles. So the system would be at risk if extravagant salaries and incentives are linked to profits which lead to risk taking behaviour.

When somebody is having socially unacceptable benefits at the cost of a wide range of stakeholders such as the depositors, the share holders, and the borrowers, it could create a tension in society and we sense it already. Highly paid executives must be compensated adequately for their productivity but that also needs to be at a socially acceptable range. It is also an issue that is being taken up globally. I do not see any reason for Nepal to be an exception in this matter. We are looking at managing salaries in a transparent way which will be socially acceptable. Besides, it will be sustainable for the institution too.

 I guess my friends in the banking sector have understood it differently, and were hence provoked. We have basically focused on setting norms that would guide the salaries and perks of the CEOs, not on limiting it in numeric terms. We are definitely not looking at fixing salaries; it's for the banks themselves to determine salaries for their CEOs. The recent guidelines which have existing laws embedded in them are only the parameters to follow.

 

There does not seem to be much success in the operationalising of the monetary policy for this fi scal year. How would you evaluate it?

It is premature to judge the output of the monetary policy. On the macro outputs, things are improving, the rate of inflation is decelerating. It has come down to single digit on basis of new calculations. On the built up of reserves, we expect to have Rs 9 billion additional reserves in one year. In the first three months, no additional built up has taken place. As this is the festival season, we Nepalis spend more. The November data will show how we can recover towards that direction. There are a couple of other areas where we needed the compliment of fiscal budget such as for mergers and acquisitions where fiscal incentives are also necessary. This indeed has been addressed by the national budget. Similarly, we need this for some of the developing financing areas where the central bank and the finance ministry have to work together like in hydro-power financing, tourism financing etc.

One issue that has also drawn flak is on the conditions set to open bank branches in the Kathmandu valley. Critics opine this was brought into effect too late, after existing banks have had enough braches in the valley. The new banks are allowed to have their corporate office and one more branch in the valley. But if they want to have more branches, we want them to serve the remote and the semi-remote areas too. If a new bank opens at least one such branch, it can always come back to open a third one in the valley.

And to facilitate their business transactions, we have allowed them to have multiple branches in the border areas. So the new banks are in a position to open at least ten branches which is a good number. In this context, even the banks have to find new areas of savings mobilisation. I think it should work for the banks to explore virgin areas for the operationalisation of savings and credit. The problem begins when some banks are opening branches without properly accessing the commercial viability of the branches and accessing the capital base.

 In that case, it becomes the responsibility of the central bank to intervene. That's why we have stepped in this process to see that the banks branching policies are in the right place. It's certainly not to create bureaucracy. It is simply to ensure that a majority of the population in this country have access to finance.

The central bank has announced to withdraw all notes bearing the image of former monarch from the market by the end of 2067 BS. What are the costs and benefi ts of this move? What are the bank's plans to introduce more durable notes?

The withdrawal of the notes in circulation with the former king's image needs to be honoured. We have been delaying because there is a cost involved to it. We want such notes to be naturally phased out in a manner such that the notes that come back to the bank will not be re-circulated. In terms of volume, most notes have already come back to the central bank. We have in circulation notes worth about Rs160 billion outside the central bank out of which only about Rs 4 billion notes are with the former king's image. On the issuance and printing of more durable notes, it has two dimensions.

The short life of the existing notes is because of our culture and habits. We certainly lack the consciousness and responsibility to handle notes. We must understand that this is a national property and spoiling or damaging notes costs money. Any savings from printing notes adds to the government's coffer in the form of dividend. This ultimately goes to the people in different areas like education, health, transportation etc. Habits like culturally colouring, writing and worshiping with water over notes have to change over time. The second point is the quality of the note itself. That would imply shifting away from paper notes to polymer notes. Polymer notes, if properly printed and designed, last longer than paper notes. That is the policy shift we have to make. The polymer notes we had earlier with Rs 10 denomination didn't yield a good result. Although most countries are now already entering the polymer notes scheme, we are still in the process of finalising it. We are looking at better quality polymer notes in circulation and also at raising the people's awareness on handling them properly.







 

On the one hand, NRB seems convinced that the existing number of banks in Nepal is too high, while on the other you continue to issue new licences. Isn't it a contradiction?


Actually, when we gave letters of intent to at least half a dozen banks, we decided that we have to have a moratorium on establishing new banks. When we say no more banks, we don't say that there are already six banks which have been almost approved. My colleagues in the central bank had taken this decision before my appointment as the Governor. They had indeed said ''no to more banks after having approved at least half a dozen of them. That's what has confused people. Since my appointment, I haven't approved a single new commercial bank. The banks that have opened are a result of the decisions made in the past. There are two more banks coming up very soon which are again decisions from the past. Since April 2010, we haven't had any letter of intent issued to open any new bank. After joining the NRB, I have encouraged class D, C and even some B class banks which can operate outside Kathmandu in order to expand financial access to the rural areas. The other dimension is that some banks have asked for upgradation from class C or B to class A. They have been issued letters of intent before or have been given some kind of assurance from us. Now, with our policy of no more commercial banks we need to make decisions on those who have already been given green signal to be graduated. Whatever the internal challenges may be, the main issue is that we have enough commercial banks - 30 of them on the last count. In terms of number, 30 commercial banks are enough but in terms of financial access, services and the capacity of the banks to go into the rural market, we are lagging behind. The total capital of the commercial banks is perhaps between Rs. 50 to 60 billion.

If you are developing a 200 MW power project, you can access the cost but even the entire capital may not be enough. In that sense, this is still a small shallow financial market. So now the challenge is to seek ways to expand the services of the existing banks as well as to enhance the quality of the banks. The reallocation of the resources from less productive to more productive areas and to see that the poor are having some access to capital needs a look-in too.
 

Banks are reportedly going to face a liquidity crunch again?

What are NRB's plans to avert this situation? First, the central bank must guide or warn them about such a scenario. Before Dashain when banks had a lot of cash, apparently they were trying to bring the interest rates down. Publicly, I said that it's too hard to decrease it, perhaps you have to wait and see, and perhaps you should look for new avenues of investment. So that was my concern and that is still valid. I would request the banks to continue with the interest rate that is necessary. The second point is we have seasonal withdrawals. Before Dashain, people want to have new currency notes so they withdraw more money from the banks. They also change old notes with new ones. Usually, the new notes are with the people till Tihar. Once the festivities end, these notes are back in circulation in the market. Thirdly, you must take into account the harvesting season. The new notes can come to the market only when there are certain activities in the agricultural sector. You should have new production which has to be transacted that demands money. Once the notes circulation gains momentum, it enhances liquidity and that brings money back to the banks. That cycle will start when the paddy comes to the market. The other factor is remittance. If there is a high flow of remittance, the money comes to the banks and then gets converted into Nepali currency. Either spending or saving the money is eventually bringing it to the bank. Increased remittance is a trend that starts with the start of the festive season. This money is spent largely during the festivals. The official exchange rate between Indian and Nepali currencies is still fixed at NRs 160 for IRs 100. However, in the market, an IRs 100 note is already being exchanged for NRs 165. Do you think that calls for a devaluation of the Nepali currency vis-a-vis the Indian one? I would not recommend that as we have enough Indian currency with us. The artificial trading of Indian rupee is for some other reason. Why do you think there are people who need Indian rupee in cash and even ready to pay a higher margin? NRB has been giving unlimited amount of Indian currency through the banking channels. So the story is not about the exchange rate, it has to do with governance and its controlling measures. And also about stopping the legal imports to Nepal because the issue is somewhere else than the import exchange market. Why does one need to pay NRs 165 for IRs 100 when the banks can issue cheques, drafts, LCs, and even the ATMs can be used for the purpose? It is about people who indulge in business practices outside the purview of the formal legal system. The solution to this lies with the broader surveillance issue, trade management, customs management etc.

Is that the reason for NRB to cut down the volume of Indian Currency given to the money changers?

Yes. We realise that this could put the country at a great risk. Speculation is rife that in the border areas, there might be a lot of illegal activities provoking factors which might pose a threat to the peace process. And still the central bank is liberally distributing cash currency which may not be a wise decision after all. These are times when we are concerned about terrorist financing. While looking at anti-money laundering measures, we want to talk about financial disclosures and encouraging cash transactions in the border areas.

The new monetary policy has provisioned mandatory lending to the deprived sections of the population by fi nancial institutions. But it they are trying to form subsidiary institution of their own which is agian likely to be centred in the urban areas. The actual target population, to a large extent, still lacks access to funds. How do you plan to address this issue?


We have been able to address this issue partly. What we have said that you can have some institutional arrangement to retail credit in the urban sector but that cannot be more than 1/3rd of your total volume. The major component must go to the real borrowers through some or the other mechanism. The money going to the deprived sector through any institution cannot be re-deposited in the bank at an interest payment that we have stopped. We have also strengthened our supervision to see that the money marked for the deprived sector should be spent on a daily basis. If the financial institutions fail to do so, we would not count the spending under the deprived sector. We are definitely trying to strengthen the process. We have also asked the banks to have a plan to increase their resources allocation towards the agricultural sector. It should, in part address the issues of the weaker section of society. It's a myth that poor people are not bankable. I think there is more credibility attached to them because they don't have the capacity to become defaulters.














 

What is your response to the criticism that the new monetary policy could lead towards a more restrictive regime akin to a control of socialist nature?

Critics may say what they like to but nobody is disagreeing on the evaluator economic system or the system of social justice. However, the monetary policy is not designed to address these issues but to direct credit. People must first understand monetary policy vis-a-vis the credit policy. Monetary policy is totally designed towards the macroeconomic strategy, low inflation, better reserves, enabling growth with adequate provision of credit etc. On the other hand, the credit policy could be selective and qualitative in a country like ours whereby access to finance and formal credit for some productive sectors cannot be denied. These sectors include agriculture, tourism, water, and hydroelectricity etc. If this makes us restrictive and socialistic, I would simply accept that. But monetary policy is the philosophy and is neutral to any ism. In fact, I have never heard of a socialistic monetary policy. A monetary policy is always required for creating markets. What a credit policy does is something that every country does. Look at the overall picture in South Asia. Directed sector credit programmes, productive sector credit programmes in some of the South Asian countries is higher than in Nepal. We cannot challenge Bangladesh, India, Maldives, or Sri Lanka on that account. Their credit policies are stronger than ours. So I would like to ask my good friends to look at these examples in the region.