The government needs to realize that SMEs are the backbone of the economy

Times are challenging for industrialists in Nepal. The economy is going through a recession, which is probably the deepest in living memory. The business sector is faced with a number of problems including persistently high borrowing rates, a shortage of loanable funds in the banking system and depressed market demand. 

Umesh Lal Shrestha is an established name in the industrial sector of Nepal. Shrestha, who is the Managing Director of Quest Pharmaceuticals, one of the country’s leading pharmaceutical companies, has over four decades of experience in the pharma business. He is the former Vice President of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) and former President of the Association of Pharmaceuticals Producers of Nepal (APPON). the HRM caught up with Shrestha to talk about the difficulties faced by industrialists, SMEs and pharmaceutical producers, and government support to businesses during these trying times, among other topics. Excerpts:

How the current macroeconomic situation is affecting the country’s private sector? How difficult it has been to run a business in the last one year?
We are dealing with an economic slowdown so deep that hasn’t been faced before. I don’t blame anyone for this, not even the banks. However, the policies of the central bank have played a role to some extent to create this situation.

Exorbitantly high borrowing rate is the biggest issue for the private sector at the moment. During the Panchayat regime, businesses thrived even though interest rates reached as high as 18 percent. I started my business during the Panchayat days and I remember paying high interest rates for the money I borrowed. However, we were told that the interest rate will not increase by more than 18 percent. Borrowing rates would not go up without industrialists and businesspersons knowing it and would remain the same till the end of the term period. Today, there is volatility in interest rates. After the Covid-19 pandemic, most businesspersons availed loans at around 6-7 percent interest. Suddenly, it started increasing and reached double digits.

Our economy is not just about big conglomerates, it’s made up of small and medium enterprises (SMEs). The government needs to realize that SMEs are the backbone of the economy. When the government stops looking at SMEs, then problems in the economy start to occur. This is what is happening right now.

During the Covid-19 pandemic, SMEs were the hardest hit and they are not been able to revive their business till now.

The government has a responsibility beyond just running the ministries. While it is true that the import restrictions have helped to improve the external sector of the economy. However, it’s not enough to have just one positive indicator for overall economic improvement. Our economy is based on revenue generated by businesses and the general public. The government needs to think about supporting these entities in order to ensure a healthy economy.

Are businesses suffering more than during the 2015 blockade, and the Covid-19 pandemic?
The only problem I faced during the blockade was about getting fuel. I could still afford petrol by paying Rs 500 per liter. However, this time around, the problem is much more severe than thought by the people in power. Due to Covid-19, many entrepreneurs have been without business for nearly three years. It is the government’s responsibility to support them. While the support came in the form of refinancing, it didn’t help small businesses. Most of the owners of small businesses did not even know what refinancing was. Only big businesses benefitted from the monetary arrangement.

Another problem is that banks are fully secured. For a loan of 10 million, one needs to have a property worth Rs 30 million as collateral. But are industrialists and businesspersons secure like banks? They are not. There are several risks associated with running a business such as the recovery of credits which has become a big problem for businesses currently. There is an urgent need to introduce a law that will help businesses to recover credits from the market.

When I sell my goods, what guarantee do I have that I will get the money? It is the duty of the government to ensure that the public’s money is safe. It is not only the banks that need protection.

The protests of business community members forced the central bank to amend some arrangements in the Working Capital Loans Guidelines. Why private sector is so against the guidelines? 
Let me present you with a scenario. Following the Covid-19 pandemic, I received multiple calls from banks offering loans at cheap interest rates. I ultimately decided to borrow Rs 50-60 million at a 6.39 percent interest rate, to pay it off within two years. The bank never talked about premiums while sanctioning the loan. Now I am forced to pay an interest rate of 15 percent, and of that, five percent is the premium.

When I questioned the rationale behind charging the premium, I was told it was levied as a part of the risk. But where is the risk? I have paid so many installments, and I have not delayed any repayment of the loan. On top of that, I have collateral of more than the loan amount with the bank. So I asked the bank where they saw the risk in my borrowing. I got an answer that it was the policy of the bank.

After the pandemic, big businesses borrowed money in working capital loans which they invested in purchasing properties and lands. This rampant investment in real estate blocked the money in the formal channel. In my opinion, the current problem i.e., lack of lendable funds is a bank-induced crisis. Banks are also responsible as they were highly aggressive to lend money till last year.

My concern here is what was NRB doing at that time. Did not they know this was happening? Then the clash between business people and bankers started. They (banks) wanted to recover loans at any cost. We wanted bankers to be pragmatic at difficult times. Unfortunately, they’ve proved they are not.

How have the liquidity crisis and current macroeconomic situation impacted the pharmaceutical industry?
Many people think the pharmaceutical industry is not affected by the current economic slowdown as people will continue to buy medicines. But the fact is, the pharma industry is also under huge pressure. Our company was one of the best revenue collectors in the market in the pharma industry. Earlier, the credit period used to be 15-20 days. Now, it has changed as it is taking us a long time to recover the credits.

Earlier, two months of the working capital loan was enough for our company. Now, we need four months of the working capital loan. Luckily, banks haven’t been much reluctant to lend money to pharmaceutical companies. But the cost of doing business has increased as the time to recover credits from the market has gone up.

What is the size of the pharmaceutical industry of Nepal? What is the market share of domestic companies?
The market size of Nepal’s pharmaceutical industry is Rs 70 billion. Of this, Nepali pharma companies hold a market share of 50 percent, roughly around Rs 35-40 billion.

We can’t produce 15-20 percent of medicines because of technology and economic issues. I would say 50 percent of demand is fulfilled by foreign medicine suppliers.

Of that Rs 40 billion, the top 10 Nepali pharma companies hold more than 50 percent of the market share. The rest of the pharma companies are struggling to stay in the business. There are firms with annual business of Rs 4 billion. But, another side of the story is, if you go beyond the top 10, the number 11 company’s business is much lower. Now one can imagine the pain of the 84th pharma company.

We have 84 pharmaceutical companies in the market. A lot of them are entering the market just for the sake of doing business. The government should know that if a company fails, the money of the country will also go in vain.

What challenges Nepali pharmaceutical industry is facing currently?
The main challenge is in maintaining the quality of medicines. The production cost of the pharma companies is high, but the government is yet to understand this fact. The government always asks us to manufacture medicines at cheaper prices. In 2064 BS, the government fixed the price of a paracetamol tablet at Rs 1. It takes Rs 1.70 to manufacture a tablet of paracetamol. Now the raw material cost has risen but we are still forced to sell paracetamol at the same price. This kind of system really hurts our business.

It is not that we have not told the political leadership about this, but they say making adjustments to the market prices of medicines politically will hurt them.
Similarly, setting up a laboratory for a pharmaceutical company is not cheap. Research and development (R&D) in this sector is really important. There is no research company in Nepal. So, you have to set up everything. To fulfill the gap, Quest is setting up an R&D unit in Kathmandu. It will be constructed in three years. It will also be useful for other pharmaceutical companies.

We are competing with the pharma companies of India. India is a big market with big players who receive government subsidies under 35 different titles. We have to compete with them. We have no subsidies except 20 percent tax benefits. In India, the government also provides subsidies for export. Those companies are selling pharmaceutical products for trillions of rupees.

A foreign company in Nepal pays an annual fee of Rs 50,000. And per product, they have to pay Rs 1,500 annually. Now let’s take the example of Cambodia. If I go there to establish a company, I have to pay USD 10,000. For every product that I register there, I have to pay USD 500 per year. In India, I have to pay USD 5,000 as an entry fee, and USD 500 every year for every product. See the difference between India and Nepal. How can we compete? There should be a fair playground.

How is the availability of human resources in the pharmaceutical industry?
It is getting better. People are getting experience. We are also sending people abroad. We are sending people for Ph.D. and Master’s degrees. The one big thing absent is the lack of connection between academia and industries in Nepal, which I believe there should be.

People with high potential are going abroad. They think they cannot develop careers in Nepal. But if they apply for a job, we pay a good amount of money. People are the biggest assets of any company.

You are in the Federation of the Nepalese Chamber of Commerce and Industry (FNCCI) for a long time. FNCCI is accused of being a club of big bulls. What is your take on this?
FNCCI is centralized, where just the president matters. Of late, getting elected has become more difficult as the organization has become politicized. This is why some people are saying it is a ‘big bulls club’.

I say if you are vying for a big post in FNCCI, you stay away from business for two-three years. That is what I am doing. I only attend board meetings, but I stay away from active business. I am fighting for the post of Senior Vice President in the next election of FNCCI.

You are planning to fight for the senior vice president post in the upcoming FNCCI election. What are your agendas?
The first agenda is to improve the organizational structure. FNCCI has not been efficient. Structurally, the organization is very big so we have to systemize that. We even have a provincial structure, but they are just as good as the governments. So that needs to be improved as well.

All FNCCI offices have independent status. They are not the branches of the FNCCI, which is good. But when it comes to having the same voice, there are differences. For example, the FNCCI told the district chapters not to hold protests against banks before the general elections.

FNCCI leadership is reluctant to raise the voice for small businesses. Recently, we saw a horrible incident of self-immolation of a small entrepreneur in front of the parliament building. How serious was the private sector body after the incident? The individual raised many important issues. Has the leadership shown any seriousness to raise the issues?  
Non-response is another major problem in FNCCI. A few months after getting elected to the top post, elected businesspersons stop taking phones. I do not know why this happens. But I will put my efforts to change this.

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