The policy measures of NRB are in the best interest of the Nepali society at large

At present, Nepal’s economy is probably facing one of the most challenging times in living memory. After the start of the Covid-19 pandemic three years ago, the economy headed south, and the most difficult phase was seen in the last one and a half years. The Nepal Rastra Bank (NRB) took some bold yet unpopular measures to address the issues that came in the form of serious problems in the external sector of the economy over a year ago. Now as the external sector has improved, the government’s resources have been affected and there is a downturn in economic activities.

Dr. Gunakar Bhatta is the Executive Director & Spokesperson of NRB. In a conversation with the HRM, he talked about the current challenges, improvements in the external sector, and NRB’s focus to revive the economy, among other topics. Excerpts: 

The latest macroeconomic report published by the Nepal Rastra Bank (NRB) has shown improvements in key indicators of the external sector of the country’s economy. However, economic sluggishness continues as market demand has not improved yet. How do you see the prospects of economic activities gaining momentum in the coming days?
Nepal Rastra Bank (NRB) along with the Nepal government took major initiatives to maintain external sector stability. NRB tightened its monetary policy stance, introduced the provision of cash margin while opening letters of credit for some selected items, and continued moral suasion. Also, the government restricted the import of some items whose consumption could have been deferred. These measures have resulted in a comfortable situation in foreign exchange reserve management. Today, the reserve adequacy is for 9.4 months of goods and services import, and the foreign reserve amounts to USD 10.5 billion.

The major threat in reserve management has been subsided. This should be utilized as the basis for regaining expansion in economic activities.

While last year in spring we were talking about possible reserve deficiency, now the discussion is on economic expansion. This is truly a good sign. Though there is uncertainty in the global economy and people are talking about subdued economic growth, we still have the prospect of attaining growth of around 5 percent in this fiscal year. The government has become relatively stable. This should push for capital spending as the government plays the propeller of growth in countries like ours.

Also, the petroleum price has come down compared to last year. Further, the lending rate is coming down. These all have paved the way for expansion in economic activities. I think that the economy will grow around 5 percent in 2022/23.

The measures taken by NRB and the government last year to stabilize the external sector have caused a sharp contraction in the government’s resources this year. How is NRB observing this situation?
Of course, there is fiscal stress. The exchequer is in a revenue deficit. There has been a revenue deficit only on a few occasions in the last five decades. Revenue deficit occurred in FY 2009/10 and FY 2010/11 along with the balance of payment (BOP) deficit in FY 2009/10. Thus, there is a tendency for revenue contraction along with the external sector imbalance. Revenue increases at the time of economic expansion owing to increased imports. Once the imports controlling measures are introduced, revenue shortfall prevails. This shows the fundamental problem of our economy suggesting structural reform where the revenue base should be widened based on domestic activities and internal production.

Though there is a revenue shortfall compared to the target and the collection so far is lower than the last year, strong administrative measures to curb leakage, particularly in the border points will help to increase revenue collection. The informal trade needs to be checked. Controlling informal trade will also boost revenue and help increase remittance.

The banking system has come out of a severe liquidity crisis. How is NRB ensuring that this problem does not reoccur in the coming days?
Liquidity, external sector balance, and economic growth all are interlinked but move in opposite directions in our context. Once economic activities expand, a surge of credit growth takes place. Largely in Nepal, higher growth has been attained after some shocks, which cause a sharp rise in imports. We can see this phenomenon in the last economic expansion which took place immediately after the earthquake until the first election under a federal system. Nepal recorded economic growth of 7.75 percent on average from 2016/17 to 2018/19. Such continuous economic expansion in three years was attributed to high imports resulting in liquidity pressure and interest rise.

When things were getting normal in 2019/20, the Covid-19 prevention measures affected the economy. Again, with the containment of the Covid-19 pandemic, imports rose unprecedentedly in 2020/21 and 2021/22 and the banking system underwent a huge liquidity shortage.

So, in order to balance liquidity in the banking system, we need to be cautious about imports rise, possible leakages in revenue, and remittances. Civic awareness in controlling informal trade along with the proactive role of law enforcement agencies is very important. Equally important is to make sure that interest rate does not go too low to check conspicuous consumption and unwanted imports. When imports are managed, and remittance leakage is checked, the banking system will have liquidity ease.

Even with the improvement in the liquidity situation, bank lending rates are still on the higher side. How do you see the prospects of borrowing rates coming down to single digits? 
Bringing lending rates to a single digit is a huge challenge. If we only think about lowering the lending rate, it might have negative repercussions on savings, trade balance, remittances, and foreign capital inflows. So, we have to be pragmatic in talking about the interest rate.

The rate should not be too high causing a contraction in investment and discouraging entrepreneurs. But at the same time, we have to think about depositors who are unorganized and whose saving is interest rate sensitive. Nevertheless, the recent announcement by NRB asking banks to lower spread at 4.2 percent by mid-April and 4 percent by mid-July will force banks to lower lending rates by at least 1 percentage point. Also, banks have already slashed deposit rates. These moves will help lower the interest rate on loans.

Moreover, careful analysis on the part of the borrower before taking a loan is very important. Banks as well as borrowers should be careful in this regard.

The private sector has been very vocal against the NRB and banks lately saying that the policies have hampered their business and have badly affected the investment climate of the country. Do you agree?
NRB has always worked for the broader public interest. Since this is a public institution performing the responsibility of the regulator, it has to take into account the aspirations and interests of all stakeholders.

While interest groups lobby for their interest, regulators think for sustainability, evaluate cost-benefit analysis and go for efficient outcomes whereby public interest can be preserved. So, I would like to assure you that whatever the policy measures NRB has been adopting are in the best interest of Nepali society at large. When markets do not do justice on their own, then comes the role of the regulator and that’s what NRB has been pursuing.

Many say the monetary and other policies of the central bank in recent years go against the norms of free-market that the country adopted three decades ago. Why is it that after decades of expansionary policies, NRB is taking a conservative approach at present? 
An open economy and free market are at the heart of our macroeconomic policy. Markets are better at innovation and competition. So, there is no question about policy reversal.

However, central banks all over the world think of sustainable outcomes for which they are judged conservative. Popular ethos does harm society in the long run. Politicians can go for cheap popularity, but central banks cannot compromise macroeconomic stability. This is what central bankers all over the world today are going for and are complained about.

However, the cost of high inflation and distributive policies are to be borne by society in the long run. A case in point is the cost of distributive policies that Sri Lanka is paying today. So central banks cannot plead for subsidy, money printing, and allowing borrowers to develop moral hazards.

Of late, the rise in non-performing loans (NPLs) of banks and financial institutions has emerged as a major concern regarding the financial health of BFIs. What factors are behind the growing NPLs? As the regulator, how is NRB working so that BFIs keep their NPLs under the statutory limit?
NPL of banks is still below 3 percent. As of mid-January, the NPL of commercial banks is 2.49 percent and the NPL of A, B, and C class institutions is 2.63 percent. Unless the NPL exceeds 5 percent, we don’t need to worry too much. However, the ongoing difficulty in recovering the debt is a serious challenge for BFIs. But we believe that once capital spending takes place and economic activities expand, the flow of money will increase subsequently helping debtors to pay their installments.

This is a time of self-restraint on the part of both borrowers and bankers. Small entrepreneurs are to be protected and NRB has made several provisions to help micro, small, and medium enterprises (MSMEs).

It is being said that the International Monetary Fund (IMF) has asked for the asset quality review of some major banks by international audit firms as the lender has cast its doubt on the current NPLs of banks in the country. Does it mean that IMF is displeased with the monitoring and supervision of NRB?
NRB’s regulation and supervision are considered top-class in South Asia. NRB follows best international practices including those of BASEL in its conduct of regulation and supervision. Strong regulation and supervision have made the banking system of Nepal safe and sound.

IMF had already mentioned the requirement for asset quality review of some selected commercial banks in its Extended Credit Facility (ECF) agreement. Thus, the much-talked independent review of the asset quality of selected commercial banks is a pre-agreed task. Such review by the external party will also help to strengthen our system.

The central bank’s push for merger and acquisition (M&A) has helped to reduce the number of commercial banks to 21 from 27 two years ago. Have the objectives for banking consolidation been achieved?
Strong banks with large capital bases and the capacity to support big projects, can weather shocks, and have the vision to expand abroad are the need of the hour. I think some of the banks are moving in this direction.

The M&A drive has made our system more resilient by limiting the space for unhealthy competition as well. So, the major consolidation of banks has been completed. But at the same time, we are fully aware of the market concentration and regulatory capture for which NRB will not have any tolerance.

Recently, NRB tightened the noose around microfinance institutions (MFIs) taking stringent measures in the lending and other activities of the class ‘D’ financial institutions. What led NRB to take a hard line against MFIs? Will the steps help to solve the problems in the MFI sector? 
MFIs are for social banking. However, in the last few years, the mushrooming of MFIs has driven the industry towards profiteering business. Wealth maximization or profit chasing should not be the goal of MFIs. A recent directive of NRB aims at mobilizing MFIs towards social banking and making them accountable to society.

NRB has made MFIs more responsible to their customers in particular and society in general by increasing the share of profit towards clientele protection and corporate social responsibility. Yet, the distributable dividend at least of 15 percent is higher than that of the return on equity (ROE) of commercial banks and almost double that of the weighted average deposit rate offered by banks.

The directive also aims at controlling the practice of chasing profit through lending to the same clients by several institutions. Subsequently, there will be no unwanted burden of loans to innocent borrowers.

A group of people has been calling borrowers of BFIs not to repay their loans. This has invited confrontation and has caused incidents in different districts. How is NRB observing this situation?
Banks grant loans by transforming deposits collected from millions of depositors into risky assets. In this sense, banks are transforming risk in society helping savers to save and entrepreneurs to invest. So, there is no issue of saying no repayment of the loan. Of the total deposit of Rs 5.3 trillion in our financial system, Rs 4.8 trillion is in the form of loans.

Saying no repayment of a loan and instigating others for the same is an ill practice even from the perspective of normative economics. If such types of instances continue, law enforcement agencies might also have to use further stringent measures to discourage anti-social practices and contain such behaviors.

The government has presented a Bill to amend the Nepal Rastra Bank Act, 2002 to bring large savings and credit cooperatives (SACCOS) under the purview of NRB. How is NRB planning to monitor such financial institutions? 
NRB has already been playing multiple roles. These include the role of policy maker, regulator, advisor, and banker to the government. Given these, further broadening the responsibility of NRB might derail its operational autonomy.

Though in the face of increasing failures of cooperatives, the argument for bringing SACCOS under NRB’s regulatory purview might seem convincing. But given the huge number of SACCOS in the country and the way they have been operated and managed, there is a need for a separate specialized agency to regulate such institutions. So, the government without any delay should move forward in establishing a specialized agency as a regulator and supervisor of SACCOS. NRB can provide technical and other assistance in the initial phase of the establishment of such an agency.

Leave a Comment

Scroll to Top