After going through a challenging period during the Covid-19 pandemic, the Nepali banking sector is now surrounded by challenges stemming from the external economic imbalances of the country and a liquidity crunch, which appears to be the most severe shortage of investible funds in the financial system in the living memory leading to a sharp hike in interest rates. Industrialists and businesspersons in different parts of the country have come out to the streets to protest against this situation. In an interview with the HRM, Anil Kumar Upadhyay, President of the Nepal Bankers’ Association, talks about the current liquidity crisis, economic challenges, and the way forward for the banking sector. Excerpts:
Industrialists and businesspersons in many parts of the country have been protesting against banks saying that interest rate hike and the severe shortage of liquidity has made it impossible for them to continue their business. How do you see the protests?
First, we have to see what is happening globally. The global economy is facing a recession. From carrying costs to dollar exchange prices, everything has become costlier. On top of that, Nepal’s currency is in a weak state. These are the impacts of the pandemic and recent geopolitical matters. Due to the situation, businesses are reporting a significant decline in their sales. Globally, skyrocketing inflation is the biggest concern of policymakers and central bankers at the moment. However, banks and financial institutions currently have limited resources.
Having said that, we should not panic as these are short-term problems. With time, the inflation rate will fall. The interest rate has gone up for deposits by 3-3.5 percent, resulting in an increased interest rate in borrowing too. Businesspersons should understand this situation.
Business community members are accusing banks are ‘extorting’ money from them in these difficult economic times by raising interest rates. Why have banks resorted to increasing interest rates after maintaining stability for relatively a long time?
There is a process for everything. Banks have been working under the regulatory framework of the Nepal Rastra Bank. We have been following the interest rate spread. Shouldn’t banks maintain a gap between deposits and lending?
During the Covid-19 pandemic, we provided loaned money to businesses and ordinary people at cheaper rates. At that time, the market was inundated with excess liquidity.
Now there is a shortage of investible funds in the financial system and banks are working accordingly. It is not like banks are “extorting money”, we are following a process in the financial system.
Why is the acute shortage of investment-grade liquidity continuing despite a sharp decline in demand for loans and hike in deposit interest rates?
During the Covid-19 pandemic, the liquidity was in excess but the borrowing demand was low. So there was a massive flow of loans at low margins. The central bank also introduced refinancing for industries and businesses and affected by the pandemic. There was relaxation on loan repayments with restructuring and rescheduling of loans. It needs to be understood that those relaxations can’t be continued for a long time given the structure of our economy.
Lately, a huge gap in financial resources has been seen with low deposit levels and higher demand for loans. In recent years, banks have opened new branches across the country as mandated by the central bank’s policy to increase access to banking among the people resulting in increased demand for loans. In the month of Ashad in 2078 BS, the lending rate was 8.43 percent which is now 12.6 percent. But in 2075 BS, it was 12.46 percent. So there is not a big difference. It is just like the voices have been louder this time. It is also because businesspersons were getting loans at low interest rates for a long time.
Currently, banks are under huge pressure to sustain their financial resources. The refinancing facility is still in place, but liquidity is scarce in the market. The money invested during the Covid-19 period hasn’t come to the formal channel.
On top of all these problems, the Nepali rupee has become historically weaker against the US dollar over the past year. So, more money is spent on importing goods contributing to the shortage of loanable funds.
We have seen shortage of liquidity at different times over the past couple of years. How is the situation this time different from past shortages?
Currently, BFIs have been following CASA (Current Account Savings Account) model, meaning they are focused on high-cost deposits with a long-term prospect. Likewise, BFIs have issued bonds and debentures to manage long-term resources.
In this situation, if we do not cover inflation with the interest rate, why would people deposit their money in banks? The money will go to unproductive sectors. It is our responsibility to save the public’s deposit with the right interest rate. We have been offering attractive interest rates, so people deposit their money in banks. If the deposit interest rate is low, money will not come to the formal financial channel.
At present, not every loan is costly. In the productive sectors, where there is 28 percent of the flow of BFI loans, banks have been charging just a two percent premium over the base rate.
The situation right now is such that even banks have been surrounded by many problems. We have been using different instruments such as the Standing Liquidity Facility (SLF) and overnight repo.
Many blame the policies of the central bank for the current problems. How do you see this?
BFIs work under the regulatory framework of the central bank. Banks are public companies, so they are transparent. If we observe flaws in central bank policies, we can always suggest correcting flaws in monetary policy reviews. I think the interest rate is not the only problem of businesses, they have also been facing difficulties due to the arrangements related to working capital.
When banks are at risk, the whole economy is also at risk. The size of Nepal’s annual budget and the business of BFIs are the same. Imagine a scenario where banks are unable to make profits and are facing losses. Wouldn’t such a situation be risky for the country’s economy?
What needs to be done to ease the liquidity crunch?
The government needs to speed up its capital expenditure. Similarly, our focus should be on attracting foreign direct investment (FDI). Meanwhile, remittance inflows from formal channels need to be increased. It should be understood that interest rate is going up globally. These are definitely challenging times for all of us. Let’s work to face the challenges together.