“Liquidity related problems, interest rate stability and optimum utilisation of available financial means are NRB’s current focuses.”

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“Liquidity related problems, interest rate stability and optimum utilisation of available financial means are NRB’s current focuses.”

 
Nepal’s financial sector and the capital market have been facing several mounting challenges. There are a number of problems threatening the financial stability of the country such as the acute shortage of investible funds in the banking system which has been a recurring factor for some years now. This has been causing instability in bank interest rates. Similarly, the problems in the banking sector have been causing volatility in the stock market.  In November, the sharp fluctuations in the stock index Nepse led to an agitation by share investors who demanded the government and the central bank to take immediate steps to put a stop to the financial losses being faced by the investors. Besides, the widening trade and balance of payment (BoP) deficit and dwindling foreign exchange reserves are also sending alarming signals. 
 
In early December, the Ministry of Finance formed a high-level committee with Nepal Rastra Bank’s Deputy Governor Shiba Raj Shrestha  as coordinator to study the issues in the financial sector and find ways to address the problems. The panel in mid-December submitted its report which included a 58-point recommendation.In an interview with New Business Age Shrestha talked about the issues in the financial sector and the steps being taken by NRB to address them. Excerpts:
 
How will recommendations of the high-level committee be implemented?
The committee was mandated to identify the issues and find solutions to address the problems related to financial stability in the country. Particularly, after the promulgation of the federal constitution, the business environment improved and economic activities flourished. Besides the activities of the private sector, the increasing momentum in the post-quake reconstruction and infrastructure development contributed to the rising demand of credit. However, credit growth outpaced the growth of deposits leading to the increase in the interest rate. The increase in bank lending rates affected several economic areas including stock and bond markets. The imbalance in the management and mobilisation of financial means and resources is the problem at the moment. The committee has presented 58-point recommendations which includes measures for financial stability, interest rate stability for promotion of investment in the priority sectors, expansion and modernisation of the financial sector, stability and structural improvement of the share market and the development of the bond market along with management of financial means and resources. Necessary steps will be taken by the government to address the issues.  
 
The policies of the government and the central bank are being blamed for fluctuations in the stock market. Is there any role for the government and the central bank to direct the movements in the stock market?
 Imbalance in one area of the economy affects other economic sectors. NRB seeks stability in the stock market in line with the macroeconomic stability of the country. The central bank has been formulating and implementing policies including the Monetary Policy keeping in mind the stability of internal and external sectors of the economy. The initiatives of both, the government and the central bank, are aimed at strengthening the stock market. Moreover, the movements in the stock market have their own dynamics. 
 
Investors also say that implementation of the Nepal Financial Reporting Standard (NFRS) caused the decline in profit of listed companies leading to the decline in the Nepse. What do you say to this?
Good governance is the foundation for reliability in the financial sector. There is a need to adopt good national and international practices in a timely manner to enhance the trustworthiness of the country’s financial sector. The implementation of NFRS should be taken as the adoption of a good practice. I don’t think it is appropriate to question good practices by analysing only one aspect or a momentary situation. 
 
The shortage of investment-grade liquidity has been recurring on a cyclic basis over the last few years. Why isn’t NRB able to take concrete steps to find a long-term solution to this particular problem?
I think the situation of investible funds in the banking sector needs a fair analysis. For example, by the end of Asar 2071 BS, deposits and credit amounted to Rs 1.4 trillion and Rs 1.1 trillion respectively in the banking system. By end of Kartik 2075 BS, deposits totaled Rs 2.8 trillion and credit reached Rs 2.6 trillion. The credit growth is still around 25 percent. It is obvious that the demand for loans has increased due to the country’s improved economic environment. However, the current imbalance between the collection of deposits and extension of loans is due to the limited sources of deposits. This has led to the increase in bank interest rates. We have been asking BFIs to show restraint and act in a discretionary manner at a time like this. The focus of NRB is to address the problems related to the short supply of investible funds by maintaining interest rate stability and optimum utilisation of available financial means. 
 
Bankers argue that the existing arrangement of credit to core-capital-cum-deposit (CCD) will end after the implementation of Basel III. Meanwhile, the central bank thinks the implementation of many technical aspects of the framework such as the countercyclical capital buffer as quite difficult in the current situation. Is it really hard to implement Basel III?  
NRB has been implementing the provisions of Basel III on a timely basis. As I mentioned earlier, it is not a correct approach to reach a conclusion by just analysing a single aspect or a momentary situation. The issues will be addressed in a timely manner keeping the financial stability of the country at the centre.  
 
Bankers have been asking to either abolish the arrangement of CCD ratio or to relax it. At the same time, the central bank is said to be trying to show flexibility in CCD. What is the situation?
In the past, NRB provided some concessions to BFIs in view of the situation of the financial sector by ensuring such supports do not affect the country’s financial stability. We want maximum utilisation of available financial means and resources looking at the country’s economic activities and business environment. So, NRB made an arrangement to allow BFIs to include their interbank lending in the source while calculating CCD. We are constantly analysing the financial sector and won’t take any steps which can adversely impact the sector’s stability. NRB will continue to adopt good international practices in terms of mobilisation of liquidity and financial means to decide CCD related issues. 
 
It’s been a year since the implementation of the Interest Rate Corridor. But don’t you think the current fluctuations in bank interest rates have put a question mark over its effectiveness?
The main objective of the Interest Rate Corridor is to maintain stability in the financial market by keeping the interbank interest rate under a certain boundary. It has not been long since we started such a practice. Meanwhile, the work procedures of the Interest Rate Corridor have been amended and it’s upper and lower level bounds have been revised in order to raise the level of effectiveness of the corridor.  
 
What do you think are the reasons behind the instability in the interest rate?
Like the price determination principle of economics related to demand and supply, the balance between deposits and lending determines the interest rate. In the case of Nepal, the loan flow of BFIs and its area, sources of deposits and its growth play a role in determining the interest rate besides the above mentioned factor.
 
The country’s forex is depleting fast, the trade deficit is skyrocketing and the balance of payment (BoP) deficit is widening at an alarming pace. How is the central bank assessing the possible macroeconomic risks from these factors?
 Lately, the stability of the external sector has become one of the major concerns. NRB has introduced several measures to address the problems. We have taken the necessary steps related to imports and foreign currency payments in order to lower the pressure created by widening BoP deficit in the foreign exchange reserves of the country.  I want to make it clear that there is no need to panic because of the current situation.  Despite the widening trade and BoP deficits, the banking sector has enough foreign exchange reserves to finance imports for around eight months. 
 
Recently, the Article (IV) mission of the International Monetary Fund (IMF) has suggested NRB to again hike the paid-up capital of banks. How has NRB taken this recommendation?
The recommendation of IMF is positive in terms of further strengthening the BFI sector. However, I don’t think introducing a new capital structure for BFIs is immediately feasible. The central bank will take necessary steps in the right time in this regard. We have reached the final phase of the latest round of paid-up capital increment of banks and financial institutions. Over the last four years, the assets and liabilities of BFIs have grown by two folds while their paid-up capital has increased by up to four folds.
 
The autonomy of the central bank has come under question due to the rising interference of the government in the bank’s affairs. Is this true?
Since its inception in 2013 BS, Nepal Rastra Bank has remained as an autonomous body. The role and responsibilities of the central bank have been clearly mentioned in the Nepal Rastra Bank Act. NRB has been working according to the Act by keeping the economic stability of the country at the centre. Similarly, NRB is also playing its role as the economic advisor, banker and financial agent of the government as per the law. In this respect, the central bank has been coordinating with the government to fulfill its duties and obligations. 
 
The government has implemented the subsidised loan scheme which is aimed at fostering youth entrepreneurship. But given the failure of such programmes in the past, how hopeful are you about the success of this scheme?
We are hopeful that the subsidised loan scheme will play an important role to enhance the competitiveness of the targeted sectors. This type of programme will be helpful in creating employment opportunities and supporting the country’s economic development. It is our responsibility to raise the level of effectiveness of this programme and the central has been supporting it through all available means.

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