Manoj Gyawali is the Chief Executive Officer (CEO) of Nabil Bank. He was appointed CEO on March 26 of this year, after serving as the acting CEO. Gyawali began his journey at Nabil Bank as Deputy General Manager (DGM) in August 2020, and was later promoted to General Manager and Deputy CEO.
Known for his inspiring speeches and clear communication, Gyawali possesses extensive leadership experience from his tenures at Nepal Rastra Bank and various commercial banks. He is also a qualified Chartered Accountant with more than 26 years of experience in the banking and capital markets sector. His career includes key positions at Nepal Rastra Bank, Global IME Bank, Global IME Capital and Jyoti Bikas Bank. His capable and visionary leadership has led to a remarkable career trajectory.
The HRM Nepal recently interviewed Gyawali to discuss the current state of the financial sector and the national economy. Below are excerpts from that interview.
Q: What are the expected impacts of the Monetary Policy 2025/26, especially considering the current challenges of excess liquidity and low credit demand in the banking sector?
A: Following the Monetary Policy 2025/26, the overall situation is encouraging, although there was a contraction in credit volume from mid-July to mid-August. Banks and financial institutions are expected to gradually build their portfolios after mid-August. For instance, at Nabil Bank, we have found the market to be encouraging, with approximately Rs. 12 billion in bills in the pipeline, which should lead to a significant increase in credit growth by mid-September.
Q: Has the opening of Letters of Credit (L/C) for Dashain festival imports gained momentum?
A: We expect it to start from this month.
Q: Do the provisions in the Monetary Policy 2025/26 that allow banks and financial institutions to include non-banking assets in their Tier 2 capital help alleviate pressure on their capital adequacy?
A: The Monetary Policy 2025/26 has a clear objective of generating credit demand. A key challenge is addressing the capital adequacy of banks, as increased credit may not be possible otherwise. For several years, Nepal Rastra Bank (NRB) has restricted banks and financial institutions (BFIs) from issuing right shares, causing their business growth to outpace their capitalisation. In response, the central bank has explored other options for increasing capital, such as implementing regulations for the issuance of perpetual preference shares.
It is likely that NRB will eventually allow BFIs to issue right shares again. This would provide them with sufficient capital adequacy, which is essential for achieving the monetary policy’s target of 12% credit growth. With the central bank adopting a more flexible stance to promote credit growth, BFIs must practice self-regulation. Failure to do so could result in the central bank implementing more stringent policies in the future.
Q: Do you agree with the widespread interpretation that the sudden tightening of credit in fiscal year 2021/22, after the exponential 27% credit growth in 2020/21, is to blame for the overall economic slowdown?
A: We often take a short-sighted approach when discussing economic issues. Last year, we might have attributed the overall slowdown to high bank interest rates, but I believe this is only a partial explanation. While the high credit growth during the COVID-19 pandemic may have contributed to the problem, there are other significant factors.
During the Fiscal Year 2020/21, NRB adopted a flexible stance, allowing banks to lend up to 10% of working capital, which resulted in a historically high credit growth of nearly 27%. However, in the following fiscal year, many borrowers faced difficulties as they struggled to align their portfolios with the new working capital guidelines, which were not properly reflected in their balance sheets. This created a chaotic situation, causing panic in the private sector and prompting banks to tighten credit.
Amid political instability, malicious actors initiated negative campaigns against banks and financial institutions and entrepreneurs, which the government failed to control in a timely manner. The confidence of BFIs was further eroded when a report from the Office of the Auditor General Nepal (OAGN) retrospectively highlighted revenue arrears of around Rs. 13.5 billion. Despite the government’s attempt to recover this amount through the budget, the court ruled against it. These events, along with issues such as the Ncell case and the arrest of businesspeople in the Lalita Niwas case, negatively impacted the investment climate and business confidence.
Such actions against businesspeople by the state have discouraged entrepreneurship, directly affecting job creation and economic growth. This widespread despair has led to a significant outmigration of young people, which in turn has altered consumption patterns. The low inflation rate, currently at only 2.7%, can be attributed to this substantial decline in consumption.
Q: In the current economic climate, do the budget and monetary policy effectively work together to increase aggregate demand?
A: While the recent budget and monetary policy haven’t created a significant sense of hope, they have helped to alleviate some despair and boost entrepreneur confidence with their positive aspects. The budget is grounded in realism, and the monetary policy, preceded by a circular signaling a flexible stance, has largely accommodated the private sector’s requests.
Analysing the short-term impact, we’ve seen historically high daily transactions of Rs. 26 billion. Economic activities are gaining traction, and real estate transactions are showing encouraging signs. These increases in the capital and real estate markets will propel the economy forward, and we are already seeing the initial signals of this. If the government can accelerate development spending and settle its outstanding obligations, the economy is expected to rebound, with a clear recovery visible from the second quarter onward.
Q: What is your opinion on the issues raised by revenue administration regarding Further Public Offerings transacting below net worth per share?
A: This is an issue with an open bid, especially if the bid price is below the net worth per share. The revenue administration should not question a lower bid price; they must acknowledge that returns in the banking industry have significantly declined and dividend payouts are discouraging. When a bank cannot distribute dividends for four years, it is unreasonable to expect people to invest in shares at their net worth. Consequently, bank promoter shares cannot even be sold at their book value. The banking sector, despite being a major tax contributor and a highly transparent sector, has been significantly hampered by state policies.
Q: Will the Return on Equity, which has been cited as a temporary phenomenon due to high provisioning, improve this year?
A: We are significantly constrained by regulation, resulting in high compliance costs. The premium for insured deposits up to Rs. 5 lakhs, and the cost of technology and software, are particularly high for BFIs. Despite these costs, regulations restrict us, for example, from charging a service fee of more than 0.75%, while renewal fees cannot exceed 20% of that. The pricing range for the banking sector is being squeezed from all directions.
BFIs are also compelled to operate in remote areas; Nabil Bank alone is running 37 branches at a loss. The harsh reality today is that while operating costs are high due to regulatory compliance, revenue streams are being squeezed. Although Nepal Rastra Bank allows a 4% spread, unhealthy competition in the market persists because of excess liquidity. Regulatory compliance and this unhealthy competition prevent BFIs from exploring new areas. Low fees compared to high operating costs, and the increment of capital size without corresponding opportunities for business expansion, have a severe impact on banks’ dividend payout ratios.
Q: Considering the high operational costs, do you think BFIs can sustain their lavish operations? Why aren’t they focused on minimising these costs?
A: By reducing banking costs, the benefits will be passed on to customers and the wider economy. For example, in the Bhojpur hilltops, there are over 20 BFI branches, most of which are operating at a loss. I believe two branches would be sufficient to provide adequate banking services there. The NRB’s policy, which requires two branches to be opened outside of the valley for every one opened inside Kathmandu, should be reviewed. To minimise operating costs and improve returns, the central bank should allow BFIs to close branches where necessary, provided they can arrange for customers to be onboarded at other nearby BFI branches without compromising financial access. This adjustment would allow the remaining branches to operate profitably, especially as digital banking continues to gain significant momentum.
Conversely, if the central bank does not permit the consolidation of bank branches and continues to tighten regulations on income, banks will become low-return businesses. This could lead to a rise in non-performing loans (NPLs) as banks become less able to recover their debts.
Q: Why have there been assumptions that banks’ non-performing loans have exceeded double digits and why aren’t these figures being reported accurately?
A: In the last three years, non-performing loans (NPLs) have risen exponentially, from an average of 1.67% to 4.5%. This increase has been somewhat mitigated by the flexibilities granted by NRB. For instance, contractors have been given loan restructuring and rescheduling facilities since April 2024, and small and medium-sized enterprises (SMEs) have been provided with flexible options until mid-October of this year.
Thanks to these accommodations from the central bank, many portfolios have been restructured and rescheduled. Without this flexibility, some borrowers would have defaulted, and the NPL level could have surged by an additional 2-3%. The NPL rate is expected to decrease if the economy rebounds.
Q: Why has the process for the 10 largest commercial banks to undergo independent audits by international firms been stalled and why are these banks reluctant to participate?
A: We are always prepared for an independent audit. I believe the process is currently underway, and a firm from Bangladesh has recently been chosen to conduct it. The International Monetary Fund (IMF) made this a condition of its Extended Credit Facility to Nepal, which was accepted by both the Government of Nepal and Nepal Rastra Bank. We can assume that Nepali banks are prudent and sound because we adhere to NRB’s stringent provisioning requirements regarding non-performing loans (NPLs). Once these NPLs are recovered, the provisioned amounts will be released. This will, in turn, improve capital adequacy and the dividend payout ratio, ultimately supporting growth.
Q: Can you clarify the banking sector’s stance on the deferral of the new working capital guideline for two years, especially given the private sector’s demand for a sector-specific approach instead of the current one-size-fits-all model?
A: A knowledgeable professional must admit that working capital regulations are necessary. The issue is not the regulations themselves, but the timing of their introduction and the insufficient time given for adjustment. Borrowers must also agree on their necessity; if working capital is used properly, there would be no problems. However, if it’s misused for real estate, shares, or consumption, it indicates a borrower’s poor intentions and a bank’s failure to properly monitor loan utilization.
Indicators raise questions on the proper use of credit; the credit to GDP ratio has increased from 46% to 96% in the last 10-12 years, and while bank balance sheets have expanded, this has not translated into employment, production or export growth. This suggests that credit has been used for consumption, or for purposes like land speculation, rather than productive investments. In this context, as banking professionals, we must agree that we have not properly utilised public deposits. We need to better channel these deposits, motivate borrowers to use loans properly, and the central bank should provide guidance, supervision and time for adjustments.
The ongoing despair is largely due to political instability, which has eroded public confidence. However, the country is in a good position economically. For instance, foreign exchange reserves are at a record high, sufficient to cover 18 months of imports, and monthly remittance inflows are encouraging, reaching around Rs. 200 billion.
The country has made significant progress since the 1990s, with installed power capacity increasing from 500 MW to 3,500 MW, per capita income rising from $185 to $1,500, and the road network expanding from 8,600 km to 35,000 km. The number of hospitals has increased from 1,100 to 8,000, and the population below the poverty line has dropped from 42% to below 20%. The number of vehicles has also surged from 8,600 to 5.5 million, making personal vehicles, such as motorbikes, more accessible.
Q: Do you agree that deferring the working capital guidelines and offering restructuring and rescheduling facilities will ultimately compound the problem?
A: The current flexibilities from the central bank haven’t solved the problem but have merely postponed it. Both bankers and borrowers must act with discipline and responsibility, making the necessary adjustments during this deferral period. This approach is similar to a doctor prescribing medicine to keep a patient’s vital signs and health indicators stable after a medical examination.
Q: How prudent are borrowers?
A: Bankers are financial advisors, not just lenders. We must also educate and ensure that loans are used properly. Simply extending credit and following up only for principal and interest repayments will not solve the problem. If both banks and borrowers practice self-regulation, it will resolve the issue, which I believe is what Nepal Rastra Bank is seeking.
Q: What is your opinion on directed sector lending, and do you believe it is a policy Nepal Rastra Bank should reconsider, especially given its role in the rise of non-performing loans?
A: About 45% of our portfolio is in directed sector lending. NRB has established a minimum lending threshold for sectors like agriculture, energy and MSMEs. To avoid penalties from NRB, banks are pushing loans even when there is no demand, which is an unhealthy practice. We have asked NRB to review whether a particular sector actually has a demand for credit and to make it easier to buy and sell portfolios. Instead, we should be pushing credit into sectors where there is genuine demand and a chance for growth.
The ultimate effect of this policy is that borrowers who used agricultural loans to buy land are now in trouble due to plummeting land prices and low returns from their businesses, such as crops, vegetables, poultry and fish farming. The central bank needs to review this policy, and government policies should work to stimulate demand.
Q: Could you discuss new avenues for bank financing, such as private sector investment in transmission lines, within the innovative financing spaces like green financing?
A: There are numerous opportunities for financing. Just recently, banks committed to a consortium financing of Rs. 52.50 billion for the 341-megawatt semi-storage Budhigandaki Hydropower Project. This project is being developed by a subsidiary of Sahas Urja Ltd. Additionally, the tourism sector offers new avenues, particularly in high-value, low-volume ventures, though the government needs to prioritise infrastructure development. The lending capacity of banks is a key factor in attracting private sector investment, including foreign direct investment (FDI). If all stakeholders are committed and perform their roles effectively, the country will begin to see progress.
Q: Now that NB Bank has merged with Nabil Bank, it seems Nabil Bank is facing challenges due to the credits mobilised to contractor firms by the former NB Bank. How do you plan to address this?
A: All banks and financial institutions face challenges during mergers and acquisitions. When we took on NB Bank’s portfolio, we inherited a substantial amount of contractor business loans for which payments from the government had not yet been received. This has made it challenging to maintain the bank’s quality.
While other BFIs that have undergone mergers are facing serious difficulties, Nabil Bank remains the highest profit-making and highest tax-paying bank. I acknowledge that there have been hiccups with the merger and acquisition but Nabil Bank is performing exceptionally well and is a market leader. We will gradually resolve this. The total portfolio is not very large, it includes a funded exposure of around Rs. 22 billion and a non-funded portfolio of Rs. 78 billion, and we expect it to get back on track.
Q: Does Nabil Bank have plans to issue perpetual preference shares?
A: We have obtained regulatory approval to issue perpetual preference shares worth Rs. 5 billion. We initially brought this to the attention of both Nepal Rastra Bank and Securities Board of Nepal (SEBON), citing the provisions of the BASEL Capital Adequacy Framework. After NRB issued its circular, we continuously lobbied with SEBON to create a new instrument for banks. This initiative, spearheaded by Nabil Bank, will help improve the capital adequacy of banks.
Q: Do you agree with the recent proposal from the Nepal Rastra Bank Governor for a fixed licence period for banks?
A: I’m not familiar with the context of that statement. However, if the banking sector is being compared to the hydropower sector, it’s important to recognise that the nature of their businesses is fundamentally different. Hydropower firms have a predictable capital flow but after 30 years of operation, their ownership reverts to the state because they utilise a natural resource. This model could be applied to banking if a fixed return were assured but that is not the case. Globally and even in Nepal, many banks have been operating for centuries.
Q: Why has the separation of bankers and businesspeople become a source of controversy?
A: The debate over separating bankers and businesspeople has been ongoing for a long time. It’s currently difficult to sell shares with a book value of Rs. 158 for Rs. 118. If we acknowledge this reality, the large corporations that are major shareholders of banks have no one to sell their shares to if they want to exit. This difficulty in selling shares and repaying loans means that if laws are not practical and implementable, they will be violated.
There are multiple requirements to obtain promoter shares, including pre-approval from Nepal Rastra Bank and a ‘fit and proper’ test, among others. If BFIs promoters’ shares aren’t reclassified after a certain number of years, like in the hydropower sector, their value will be diluted. None of the promoters are happy holding these shares, and they would gladly sell them if an exit were provided. From an independent standpoint, separating businesspeople from bankers is not a major issue.
Q: Would you like to convey any message to our valued readers?
A: Our country is still in good shape, so we shouldn’t give in to despair. By optimally utilising our resources, restructuring uneconomical and unwanted state structures, and re-engineering and automating services, we can achieve efficiency. Currently, 80% of our budget is allocated to recurrent expenditure, with very little for development, which highlights the need for structural reform and resource optimisation. The government and regulatory bodies must work to build the private sector’s confidence, encouraging them to stay and assuring them of opportunities within the country.
If all stakeholders make a serious effort, we could see substantial changes within a year. Political instability has created instability in all areas, including the bureaucracy. Correcting this political instability is essential for achieving the sustainable prosperity we aspire to. If it continues, the private sector’s confidence will not improve, young people will not stay in the country, and the situation will only get worse. Therefore, we must think seriously about this now. If every citizen plays their part, the country will certainly achieve sustainable prosperity.
