“It is not possible for banks to float loans at nominal spread of 1%”
BFIs have been able to maintain a balanced CCD ratio but the Nepali financial market is also going through a crisis of loanable funds. The SLR requirement that has been provisioned to maintain liquidity in the market has been working well to prevent liquidity crisis in the market. The BFIs have been holding government securities including treasury bills amounting to Rs 198 billion. We have also been issuing different financial instruments to manage liquidity but the demand for such instruments has been less so far which indicates that we are far from a liquidity crisis.
The shortage of loanable funds has been caused by several factors. The outflow of Nepal is for overseas work opportunities has declined in recent time which can be attributed to the recent political developments that has been signaling political stability in the future. The remittance income has declined as a result. Another reason why remittance income has declined is due to the exchange rate of the Nepali rupee against the US dollar that has declined from Rs 109 to Rs 102 in the last one year. On the other hand, the end of political transition has also spurred the demand for capital. We had a projection that such demand would grow by 20 percent. In the last four months up to Chaitra, the demand for loan has increased by 14 percent while the deposits have grown by seven percent only. Mobilisation of long-term loan is a good thing but we are constrained by the lack of capacity and sufficient capital. Implementation of Basel-III may sort out the current challenge but our banks don’t have the required set up to execute it. Yet, we have been pressurizing commercial banks towards the execution of Basel-III. With the implementation of Basel-III, the provision to maintain CCD ratio will be automatically lifted but it will not be able to solve the existing crisis. The KYC regulation can’t be made more flexible in view of the possibility of blacklisting in the Financial Action Task Force (FATF). Members blacklisted by FATF will be barred to carry out financial transaction with multilateral banks such as IMF and the World Bank.
We are also yet to see how long those who benefitted from illicit election expenditures during the recent elections shall keep the money in their personal vaults. We can’t agree to the demands that call for legitimising such assets. They should better think what will happen to such funds if we too go for demonitisation as India did. Although we haven’t thought along that line, it can’t be ruled out as a future intervention. In today’s time, money should be kept at banks to ensure return and security of the wealth and to promote economic activities in the country while the central bank is committed to curb tax evasion, hundi and manipulative invoicing to maintain transparency in the market. There is also a misconception about the NRB provision regarding cash withdrawal from banks. There is no provision that bars such withdrawal. Only in case of withdrawals exceeding Rs 1 million the respective bank managers have to be notified in advance. We haven’t placed any withdrawal limits for a number of purposes. At present, commercial banks are required to allocate minimum 25 percent of total credit to the priority sectors, including at least 10 percent to agriculture and five percent each to hydropower and tourism and the remaining to other priority sectors. As far as I am concerned, I support the need to increase this allocation to 10 percent for hydropower sector. In case of agriculture, a number of commercial banks haven’t complied with this provision with some failing to even cross the mark of five percent. We feel that such banks need to be reprimanded. For banks, it is not possible to float loans at a nominal spread of one percent. It is equally wrong that they are availing refinancing facility at four percent and lending it at a spread of more than five percent. We have already directed banks to maintain a spread of maximum five percent. Except for seven commercial banks and five development banks, the banks are yet to comply with the directive. The central bank has already issued a directive to penalize such banks.
On the operational side of the central bank, we are heavily under-staffed. Eighteen staffers are managing the workload of 80 staffers. Earlier, we had sought 151 staffers for which we received almost 56,000 applications. We don’t know how many years it will take for the Public Service Commission to fulfill our staff demand.
“Current crisis has also risked the investments made by non-banking financial institutions”
Over the last few years, the financial market has been witnessing growth in demand for capital. On the one hand, we have not been able to address the growth while on the other, a large portion of our existing investment is in unproductive sectors which has made the crisis of loanable funds recurring. Similarly, the informal economy is deep rooted in Nepal while the deposit base is too scattered.
Political instability in the past had an adverse effect on every public institutions including the central bank which is another reason why our problems keep on coming back. Also, it is believed that the money spent for the purpose of election campaign is yet to make its way back to the financial system. It is necessary to take note of the fact that the Nepali financial market is also affected by baseless rumours. Such rumours trigger social psychology and cause adverse impact on the market. For instance, a few weeks back, it was reported in news that big denomination bank notes worth Rs 15 billion disappeared after the formation of the new government.
On the other hand, the public views the Ministry of Finance (MoF) as an institution that only controls customs and taxes. MoF has been unable to break such misconception and establish itself as the driver of the economy. BFIs have large investment size - as big as their deposit base, but there is no evidence that suggests positive gains out of such investments for the economy. There is less investment in productive sector and long-term projects. As most of the bank deposits is short-term in nature, banks are compelled to frequently hike their interest rates.
The current crisis has also risked the investments made by non-banking financial institutions. Citizen Investment Trust (CIT) has invested around Rs 80 billion in the market but no banks are liquid enough to provide even Rs one billion to the CIT in case it needs it urgently. This is why the current crisis is more severe than it appears to be. The financial market is on a weak footing.
“Unless the government builds an effective mechanism to mobilise funds, loanable fund crisis will keep on recurring”
At present, the Nepali banking sector is principally facing three challenges. First, the trade deficit is enormously large and it won’t be resolved through small changes in the interest rates. Banking institutions have their own set of responsibilities but at present, it is up to the regulatory body, the policy devising institutions and the policy executioners to end their game.
On the one hand, financing in the productive sector has been declining. On the other hand, operational costs of industries are increasing. Industries can’t pass the increased costs to their end consumers right away. If they do so, their competitive edge will decrease. In such a scenario, it doesn’t seem wise to make investments in Nepal when the production costs are high and the bank financing is either unavailable or unviable. Secondly, our economy has always taken the course of imports to meet most of its internal demands. But now, it is necessary to establish clarity on the kind of goods Nepal wants to import. At the same time, the informal economy has been sprawling in Nepal, the extent of which is unknown to both the government and the private sector. Thirdly, every time the problem of shortage of loanable funds occurs, there is a lot of reshuffling around interest rates. Such uncertainty erodes business confidence. Out of total deposit of Rs 2,500 – Rs 3,000 billion in the Nepali banking sector, deposit of around Rs 1,400 billion is institutional, mainly coming from government institutions. Unless, the government builds an effective mechanism to mobilise such funds, the loanable fund crisis will keep on recurring. At present, capital injection of Rs 200 – Rs 300 billion would resolve the problem but there is no alternative to executing long-term policies and strategies.
“For businesses, interest rate is the key and it shouldn’t be allowed to be volatile”
First, it is completely false that the boards of the banks are pressurising their managements for better profits to match the increased paid-up capital. The central bank has issued strict directives that completely bar board interference in the management. For any wrong doing, anyone can secretly inform about it to the central bank.
Talking about the economy, the central bank must regulate irresponsible lending practices. The current crisis is the result of such practices. When there was availability of funds, banks were found to have lent at the rate of 6-7 percent. When the cost of capital in the developing countries like ours is low, people tend to take higher risks and invest recklessly. It is high time that the central bank placed a cap on unproductive investment and clearly differentiated what is productive and what is not. At present, investment in the hydropower sector is increasing. Although commercial banks are required to have at least five percent of their portfolio in hydropower sector, the actual average investment is around three percent. The central bank must increase this threshold to 10-15 percent. While foreign companies are entering Nepal with investments in the hydropower sector, it is unfortunate that Nepali banks are not showing a similar confidence in the sector.
For businesses, interest rate is the key and it shouldn’t be allowed to be volatile.
It is estimated that around 3,000 excavators are being imported to Nepal. It is basically a reflection that projects are being implemented in Nepal. The shortage of loanable funds will delay such projects. This is why the current crisis should be managed without any delay. It is up to the central bank and the government whether they do so by allowing foreign borrowing or ensuring regularity in the government capital expenditure.
“Money should be saved in banks instead of wallets”
Nepali banks have made long-term investments from the short-term deposits they receive. The investment in hydropower is for at least 15 to 20 years while the deposit base is of only one year. Banking challenges exist as there is no capital to lend to big projects in Nepal. The loan portfolio of banks is annually growing by 10 to 20 percent but the ratio of input and output is not balanced. We are lending twice the amount of the deposits we receive. Banks should come up with long term plans. The government should also prepare itself to bring hydropower projects with huge investment.
The inflow of remittance is in a declining trend. Have we kept any track of how much remittance money has been saved? It is estimated that 80 to 90 percent of the money received as remittance is used in consumption. Now our focus should be on developing the agriculture sector and make it lucrative for BFIs to invest in. It can be achieved by improving the agriculture policy so as to increase the agro productivity. It’s not that the country does not have money; it’s just that the money has not been deposited in the banking system. If the central bank changes the banking policy and the banks open their branches in rural areas, the money will enter the banking system instead of wallets of the people. The shortage of lonable money has become a recurring problem. We should move forward in a way that its recurrence is curbed and banks do not have to face any short supply of money for at least five years.
“Commercial banks alone cannot handle market demand”
The financial system of Nepal cannot be run by commercial banks alone. We, the hydropower entrepreneurs are stuck in the hole. The rate fixed in the Power Purchase Agreement (PPA) does not increase. But it is an irony that the notice of banks regarding the increment in interest rates on loans comes three to four times a year. Now, the interest rate on loans is hovering over 14 percent. It is quite surprising that there are foreign companies that are ready to invest here at 4 percent.
The situation has become such that commercial banks alone cannot handle the demand for credit. So, the central bank needs to welcome investors who are ready to invest at lower interest rates. What I am talking about is the foreign direct investment (FDI). Also important is opening of banks that are focused in infrastructure development. Such banks can be vital for investors and developers in infrastructure in terms of their financing need.
At present, the completed hydropower projects have been receiving refinancing facilities which is a noteworthy initiation of the central bank. I would like to request the Nepal Rastra Bank (NRB) to make the refinance unlimited. There are some problems for us in this regard as well. Under the refinancing provision, NRB has been providing loans to banks at the interest rate of 4 percent. Meanwhile, the commercial banks add 5 percent as premium and levy us 9 percent on the refinance loans. It is not appropriate for the banks to lend money to hydropower projects at so high premier rate. Only one percent should be added as premium.
“Interest rate dispute has created problems in banking sector”
The problems in the banking sector are the problems of the country, and it needs collaboration of all stakeholders to resolve the issues. The problems are created by us so, the solution lies with us as well. The interest rate dispute has created problems in the banking sector. The central bank should play a vital role in this regard. Time has come for the regulator to adopt a mechanism to indicate desired interest rates. The accounts of banks and financial institutions need to be opened only in the central bank in order to boost the availability of the lonable fund. If Nepal Rastra Bank (NRB) stops transacting with non-banking financial institutions, such capital will increase. NRB’s policy to increase the minimum paid-up capital of commercial banks to Rs 8 billion was the need of the hour; it can uplift the country’s banking sector, although there are some problems for banks to meet the statutory requirement. Also, the central bank has lagged behind in helping BFIs which have faced difficulties in raising their paid-up capital levels. Meanwhile, the banking sector regulator needs to put moral pressure on banks not to distribute dividends more than, say, 15 percent for some time.