Times are tough for banks in Nepal. After braving the Covid-19 pandemic for two years, banks now find themselves surrounded by difficulties due to the protracted acute shortage of investment-grade liquidity and problems in the external sector of the economy that are showing no signs of abating despite the measures taken by the central bank. Sunil KC, CEO of NMB Bank Limited, observes the need to address the structural issues of the economy to fix the problems. According to him, adopting sustainable banking practices is important in this regard. In a conversation with the HRM, he talked about the federal budget for FY2022/23, ways to address the country’s economic problems, and NMB’s focus on green financing and digital banking, among other topics. Excerpts:
The government has recently presented the federal budget for the upcoming fiscal year in the House of Representatives. How do you see the budget brought at a time when the country’s economy is facing external and internal headwinds?
The budget for the next fiscal year seeks to address major issues the country’s external sector is currently grappling with. By emphasizing investments in agriculture, the new budget aims for import substitution of agricultural commodities. It has also prioritized the development of the domestic energy sector to reduce the overreliance on petroleum products that are currently the country’s top import items. The policy to boost exports which includes cash incentives of up to 8 percent for products like clinker, cement, steel, footwear, processed water, and IT-related services as well as business process outsourcing (BPO) services will certainly help the country earn more foreign currency.
While the government has set a target of economic growth of 8 percent for the next fiscal year, I think the budget is a bit silent on how to support the credit growth that the banking sector needs to have in order to achieve that high economic growth.
In our suggestions for the budget, bankers had asked the government to remove the withholding tax levied on the loans brought by Nepali banks from abroad. However, the budget has not addressed this request. Foreign loans play a big role in filling the liquidity gap in the Nepali banking sector. Similarly, the high corporate tax imposed on commercial banks has also not been reduced.
Given the increase in the size of the budget, a sources gap exists to meet the expenditure needs of the government. This definitely raises the question about the implementation of the budget.
After the federal budget, all eyes are on the new monetary policy. With the liquidity crisis far from over and forex reserve still under pressure, the central bank has indicated that a tighter monetary policy is in the offing. What do you think should be the priorities of the upcoming monetary policy?
As the government has aimed to achieve 8 percent economic growth, there is a need to create an environment conducive for achieving that target. However, the situations in the internal and external sectors of the country’s economy are not looking favorable at the moment.
The issues of liquidity and depleting forex reserves are still there. Given the current state of the global market where inflation and interest rates are rising significantly, it is very likely that there will be a flow of capital from emerging markets to developed markets.
As our currency is pegged with Indian currency, any devaluation of Indian currency will affect us. As Indian currency is devaluating, Nepali currency also continues to depreciate.
The movement of capital from the emerging markets and the depreciation of our currency will add to the problems in the next fiscal year forcing Nepal Rastra Bank (NRB) to bring a tighter monetary policy.
One of the challenges for NRB is that if the lending of banks is to grow by 20 percent, they will need a fund of Rs one trillion. Given the current situation, managing funds of this size will not be an easy feat. So, the balancing act in terms of managing resources for funds and maintaining stability in interest rates is the biggest challenge for the central bank at the moment.
Given the prolonged shortage of investment-grade liquidity as well as the problems in the country’s external sector, what major challenges do you anticipate for the banking sector in the next fiscal year?
Over the last two years, the banking sector has significantly contributed to supporting the businesses hard hit by the Covid-19 pandemic. The policy-level interventions announced by the government and the central bank as a response to the crisis during that time were all channelized through the banking sector. Be it interest rebates, interest rate reduction, or refinancing facilities to support the pandemic-stricken businesses, the banking sector has played a crucial role in the country’s post pandemic economic recovery process.
As businesses slowly revived from the pandemic, the surge in market demand and consumption accelerated imports and inevitably led to the shortage of lendable funds. So, liquidity management and fund mobilization will be major challenges for the banks in the coming days.
At the same time, banks have invested heavily to develop their own digital and physical infrastructures – such as expanding branch networks and creating digital services frameworks- adding to their costs. However, the cap on the spread rate imposed during the pandemic is still there. My point is that the cap on spread rate and other restrictions should not hamper the commitments of banks in terms of fostering innovation and further infrastructure investments.
If Nepal wants to move towards a higher growth trajectory, the banking sector should be ready for growth. But for this to happen, clarity is needed. While we talk about bringing in funds from abroad, Nepal still does not have a sovereign credit rating. The lack of such ratings increases the risk perception about Nepal among foreign investors and lenders which will have an impact on pricing. We can aim for a higher growth trajectory if we can ensure policy-level certainty and clarity for long-term investments.
Some economists say that we would already have faced the current problems of ballooning imports and trade deficit, widening balance of payment and declining forex reserves two years ago had there been no pandemic. What should be done to resolve these problems in the long run?
The problems we are seeing now are the symptoms. The root cause is the structural issues of our economy. Now is the time to think seriously about the remittance-driven economy.
When the government begins to formulate budget, discussions start with what percentage of revenue can be collected from imports. Then only economic growth is discussed.
We know that imports cannot be immediately substituted. But there should be meaningful initiatives to increase the export of goods and services that hold competitive advantages for us. The energy sector is one such area where we can demonstrate our potential. Harnessing the full potential of the energy sector will bring a competitive edge to other industries as well. For example, the cost of cement production can be reduced substantially if cement industries receive an uninterrupted supply of power.
At present, various opportunities in clean energy development exist in Nepal for mitigation of the impacts of climate change. Banks need to invest in such areas.
We have been talking about bringing one million tourists to Nepal every year. The federal budget for the upcoming fiscal year has also stated this target. But, for a country like Nepal, the potential is there to bring 10 million tourists.
If we want sustainable business and growth, our financing should be in real and productive sectors. This will expand the ecosystem which supports sustainable growth. The focus of NMB Bank has been on helping to foster such an ecosystem.
As you mentioned, what is NMB Bank doing for sustainable banking?
In Nepal, NMB is the only commercial bank that has the stake of a development finance institution; the Dutch development bank FMO has around a 14 percent stake in NMB Bank. We also have other foreign promoters.
Ever since NMB started banking operations, it has tried to do things differently than other banks. While profit is of paramount importance for banks, NMB puts people and the planet first. This means we have been practicing a business model of value-based banking.
Excessive imports leading to an ever-increasing trade imbalance is a major ongoing problem of our economy. I believe if banks start investing in competitive and real economy sectors, not only can we address this issue but also create opportunities for other synergistic businesses.
For instance, financing a five-star hotel will be a catalyst for creating many SMEs in its supply chain.
Within 14 years of its operation as a commercial bank, the NMB has emerged as one of the top five banks in the country. This success has been achieved mainly due to our focus on sustainable banking. That is why today we have 8-10 foreign lenders working with us. Even during the difficult days of the Covid-19 pandemic, we were able to bring funds from abroad which shows the high level of trust international lenders place in us.
Nepal adopted the Green Resilient and Inclusive Development (GRID) approach in 2021 to systematically address the impacts of the Covid-19 pandemic and the country’s structural challenges. Nepal’s commitments at the UN Climate Change Conference (COP26) last year have opened several doors to opportunities for funding for green initiatives and we will align our activities with the country’s commitments. In this context, NMB is moving forward not only as a bank but also as part of the solution to major national and global problems.
The winds of merger and acquisition (M&A) have again started to blow stronger. Few commercial banks are already in the process of forging unions. How do you view this? Will NMB also join this bandwagon?
Even though NMB is a relatively younger bank, our balance sheet and credit flow show we are among the top five banks. In terms of capital, we are as strong as other banks. It shows there is no need to merge with other banks. However, we have been closely watching recent developments in the market and we are open to opportunities for acquiring other banks.
Given the current environment, is the Nepali banking sector entering the phase of consolidation? Will we have fewer but larger banks in the future?
If you look at the South Asian market, Nepal’s banking is definitely overcrowded. If we take into account banks’ numbers in terms of GDP, population and customers, we can say this. However, in terms of access to finance, it is only around 70 percent.
The way business has grown in the last 4-5 years, banks need further capital. Hence, it has opened the room for consolidation at a certain level. However, M&As should be done not just to reduce the number, but in a strategic way that would create a positive impact on the overall banking system.
The drive towards banking digitization progressed vigorously during the Covid-19 pandemic. How is NMB working further in digitization?
The median age in Nepal is 24-25 years. This youth driven demographic means this is a great time for introduction of innovative technologies and practices in banking. NMB, over the last two years or so, has made significant investments in its digital infrastructure to deliver on the promise of digital banking in terms of the ease of service it brings for our customers.
NMB’s approach towards digitization has been to gradually build a digital ecosystem which provides customers with the ability to avail services provided by the bank from their choice of digital channels and devices. In terms of internal digitization, we are moving towards end-to-end digitization and automation of our internal processes to create an efficient working environment that provides our staff with even better work life balance.
