Monetary policy encourages merger of banks

Nepal Rastra Bank (NRB), the central bank of Nepal, has recently unveiled Monetary Policy for the fiscal year 2019-20. The monetary policy aims to achieve the targeted economic growth and maintain inflation adopted by the fiscal policy through adoption of appropriate instruments. Businesses and bankers have welcomed the policy. Chinta Mani Siwakoti, Deputy Governor of NRB and Gyanendra Dhungana, president of Nepal Bankers’ Association talked about the latest monetary policy during the weekly Gorkhapatra Sambad on Sunday.
Excerpts: sambad rasta bank

NRB reduces spread rate: Shiwakoti

The monetary policy focuses on inflation control and financial stability and facilitates in achieving the growth target of the government’s fiscal policy. Besides, the monitory policy helps make the balance of payment positive, maintain foreign currency reserves in a desired limit and expand the access of finance.
Through the fiscal policy, the government has announced a target growth rate of around 8.5 per cent for the current fiscal year. The monetary policy facilitates the achievement of the growth target by channeling resources for employment promotion and entrepreneurial development. The monetary policy also focuses on maintaining stability in the interest rate. Price stability has been another objective of the policy. It aims at containing consumer price inflation within 6 per cent as stated in the government budget for 2019/20.
Monetary management has targeted to ensure adequate foreign exchange reserves to cover the prospective import of goods and services at least for seven months and expand broad money supply up by 18 per cent, domestic credit by 24 per cent and credit availability to private sector up by 21 per cent in the current fiscal year.

Incentives to merger
The NRB wants to reduce the number of banks and financial institutions (BFIs) through merger and acquisition processes without forcing them for it. To encourage the BFIs to go for merger and acquisition, we have announced additional five facilities to them while giving continuity to the existing relaxation provided by the NRB. We expect that the number of BFIs will significantly drop in the coming years.
The policy allows merging commercial banks to maintain the spread rate at 4.4 per cent. It set 10 per cent mandatory lending to the agricultural sector, and provision to issue bonds equal to 25 per cent of the paid up capital within the next two years while other banks has to fulfill this demand within a year. Our interest is to strengthen Nepali banks and make them competitive.
No research has been conducted as to how many BFIs are required for Nepal. Based on the practice and numbers of financial institutions of our neighbouring countries, we have realised that the number of BFIs is more than our economic capacity. In my view, around 12-15 commercial banks and development banks and financial institutions and 20-25 microfinance companies will be enough for us.

Focus to maintain liquidity
Growing economic activities following the promulgation of the Constitution is pressuring on liquidity in the banking sector. More people are taking up businesses, which has increased the loan demand. People are visiting banks for loan instead of flying overseas for jobs. There is a problem of loanable fund, not liquidity crisis as the BFIs are maintaining liquidity as per the NRB policy.
The policy has made it mandatory for commercial banks to issue debentures amounting to 25 per cent of their paid-up capital by the end of the fiscal. Long-term debenture will help the banks invest for long term projects and ease the loanable fund.
In addition, NRB has made a provision to allow the commercial banks to borrow in convertible currency from foreign institutions, including hedge funds. We have also allowed BFIs to collect fixed deposits in foreign currency from foreign institutional depositors and Non-Resident Nepalis. BFIs can disburse 100 per cent of such deposits as loans in Nepali currency. We will gradually ease the procedures to bring foreign currency as an investment considering the national capacity and investment. There was a problem for BFIs to bring foreign currency due to lack of country rating last year. So, the government is starting a process for country rating. Similarly, we are also rating the BFIs.

Spread rate will go down
The NRB is trying to reduce the spread rate gradually to keep it as per the international standard of 3 to 3.5 per cent. Spread rate has reduced to 4.4 per cent this year from 4.5 per cent last year. Spread rate was 5 per cent two years ago. The BFIs cannot operate smoothly if the spread rate goes down significantly, so we are reducing interest rate by enhancing strength of the local banks. The financial sector strategy of the government had announced to reduce the spread rate to 4.4 per cent by 2020/21.
NRB has brought down interest rate on general refinancing loan to 3 per cent from 4 per cent, and reduced the bank rate to 6 per cent from 6.5 per cent. It has also stated that refinancing loans of up to Rs 1 million goes to Small and Medium Enterprises at 3 per cent interest rate against existing 5 per cent. The monetary policy is in favour of small creditors.
The central bank can put a cap for investment in the share market as per the requirement and financial position of the country. The central bank controls flow of credit in the share market when the share prices boom. We will be flexible on credit if the market moves in reverse gear.

Remittance and migrant workers
Nepal is a remittance-based economy but it’s not the sustainable source. Nepali workers are compelled to work in low-standard jobs with nominal salaries abroad. We will not depend on remittance for long. We have to move towards the path of self-reliant economy by increasing productivity, creating jobs and opening industries.
Since we cannot develop industries and increase productivity immediately, the government should make the foreign jobs safer and secure through the bilateral dialogues. We have to identify the better destinations for Nepali migrant workers for short-term to earn foreign currency.
Appreciation of US dollar, entry of Nepali banks to Nepali labour destination countries contributed to the increase of remittance. It is becoming a challenge to keep the Balance of Payment in surplus due to growing import. We can replace the remittance gradually by promoting tourism and hydropower as those sectors are the major for foreign currency earning. In addition, information technology will be a foreign currency earning sector as we can generate foreign currency by selling software in international market.
Foreign direct investment (FDI) is also important to minimise the gap of loanable fund and investment in the country. The inflow of FDI will increase in the country as the government has amended the existing acts and policy related to economy. The operation of single point service centre will attract more FDI. The NRB deployed officer at the point where he/she can approve foreign currency commitment up to US$ 50 million for investment.

Gold Loan
The NRB is in consultation with the stakeholders to prepare working procedures to implement the gold loan provision. However, there is a problem to implement the provision because Nepalis have jewelleries instead of raw gold. Till now we are considering to allow the BFIs receive gold and provide loan to the customers and the NRB provides refinance to the BFIs taking gold as collateral as NRB. 


Balanced and organised: Dhungana 

The monetary policy focuses on stabilising interest rate. Nepal Rastra Bank (NRB) has incorporated most of our suggestions in its policy. The bankers are happy with this provision. The monitory policy seems more balanced and organised than the policy of past years.
Bankers and NRB differ in its assumptions regarding the interest rate because the bankers’ demand for excessive money supply for the interest stability but the policy came in a way of regulating interest rates. We can see the NRB trying to regulate banks.
The policy has tried to address the liquidity problem but there are confusions in spread. The bankers suggested that calculating mechanism of spread should not be changed.
We are facing loanable fund-crunch for the last few years, and this has led to an increase in the interest rates. Banks tried themselves to control the rate by capping its maximum limits but failed because we just have facilitating roles. The central bank has to use measures to increase money supply.
Loan expansion shows the banks still have to face liquidity crisis for more years to come. Nepal has set a goal to achieve the target of 8.5 per cent economic growth. To meet the development needs more resources are required. No economic activities can flourish without bank loans.
Bank loan depends on the interest rates. The monetary policy allows flexible interest rates on foreign loans which is good. We have also expected loan safety which has not been included. Permitting private loans from foreign institutions and allowing loans from hedging fund are also fine.
Allowing fixed deposit for the NRN is another better aspect in the policy. The policy document this time focuses on internal financial sector stability with priority.
Provision of consolidation is another important aspect of the monetary policy document. Perhaps small economy like us cannot afford to manage so many institutions as we have today. Assuming strong and big financial institutions is also good for us.
The monetary policy seems to be more balanced and appropriate on its provision to minimise the number of banks but maximise their base rate, service delivery capacity and provide multiple services from single stop. Provision to encourage banks for merger is appreciable. I believe the provision of liquidity and merger would be able to minimise the number of banks in future.
However, no survey or detail study has been carried out by the Bankers’ Association on the carrying capacity of the fiscal sector. We have studied surveys made for India and other countries.
Our population, geology, demography and other factors say that 18 to 20 financial institutions will be enough for our economy. Small GDP with limited resources and huge number of players invite unhealthy competitions in the interest rate. We have that experience last year. Issues of cross holding are still left for procurement, no matter how it comes.
We have import-based economy. In the past years, the NRB used to preserve foreign reserves that could sustain the imports of 11 to 12 months which has been minimised to only 6/7 months. This loose provision has raised the risk of foreign sector fiscal stability.
Remittance that has been the only source of foreign earning now for the country is in decreasing trend. Nothing could replace it immediately.
To maintain the balance of payment the government has to draft long run policy for tourism and hydropower sectors. Only these two major sectors can earn foreign exchanges for the country. Developing infrastructure for airport and others for tourism could assist economy in future. Small and medium industries or handicrafts production could not replace remittance at any cost. However, bottlenecks are there.
Increasing volatile interest rate of the bank lead to an increase in the number of defaulters that’s true, but it’s not the only cause. Investors calculate sensitivity rate before they invest in any projects. Fixed and floating interest rates and their effects are calculated before investing.
New Labour Act has increased operational cost and there is the risk of hacking.
There is a misunderstanding about the concessional loan. Customers think they can get the loan without any sort of security and business plan which is wrong. Appropriate base and business plan is required for getting loan.

(Prepared by Laxman Kafle and Ranju Kafle, photographs by Sagar Basnet.) 

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