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Monetary policy review addresses everything required for the macroeconomics

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Monetary policy review addresses everything required for the macroeconomics

Anirvan Ghosh Dastidar is the CEO of Standard Chartered Bank Nepal Ltd. During the course of his career, he has worked in countries like India, the Philippines, Sri Lanka and Brunei. In a recent interview, Dastidar talked to Madan Lamsal, Editor-in-Chief of New Business Age, on a wide range of issues related to Nepal’s macroeconomic situation and banking industry. Excerpts:

You have spent almost three years in Nepal. How do you see the prospects of Nepal as a country or as an economy?
There is no comparison. I think it's not fair to compare and I never compare. I think the prospects of Nepal are firstly determined by the fact that it has a very young population. We see that as a prospect. With the median age being less than 30 and a large chunk of the population being in the 40 years of age, that itself fuels everything.

The prospects, if you ask us as a bank, is clearly the energy sector if it is done in the right way to sustainable finance. Agriculture, we think, is another potential opportunity which Nepal can grow. Today, it's importing rice and vegetables, but actually it should be the other way around. If you just look at some of the sectors which are outlined as per the SDG goals, Nepal does have a roadmap. If you look at some of the sectors like education, transport ICT, and ecotourism and health, these would be the sectors we think are going to be the future in Nepal. And definitely the prospects look encouraging when you have neighbours like India and China.

What do you feel about the current macroeconomic situation of the country and the progress you already mentioned post-pandemic in the banking industry?
We are all aware that the macroeconomy is attracting a lot of attention right now, especially the BOP and reserves. It's a hot topic. It is not very unusual given that many countries are going through similar challenges, pre-COVID and post-COVID. And we don't even know whether COVID is over. Against that backdrop, you have everything that is happening. As we speak, you have an issue in Europe. Everything that's happening with oil and currencies. I think, in Nepal, what we as a bank are watching out for is predominantly three things -- one is liquidity, second is obviously linked to inflation, and there is the reserves.

Currently the tightness which we are seeing in liquidity needs to ease in some form. The government expenditure is still around 17 to 20 percent of its budget. So there needs to be an infusion of liquidity. Banks are tight, and system liquidity is tight. And hence rates are up. Inflation as per recent reports is down. But with everything that is happening with imports and oil, it is going to contribute to probably higher inflation in the coming months.

About reserves, the good news is remittances are not down -- December was an outlier and January has seen an uptick. The good news is Nepal is sending out more migrant workers now. Good or bad is always debatable. And we are back to pre-COVID levels.

The recent monetary policy addresses absolutely everything which is required for the macroeconomics in terms of corrective measures -- deceleration of imports, addressing the credit crunch. I think, coupled with all of that, Nepal should be in a situation which should be at a six month cover in terms of reserves of five and half months cover.

In that backdrop, how do you see the digital advancement in Nepal and how is your bank adapting it?
We don't see Nepal anywhere being behind given the rate at which adoption is happening. Again, it goes back to the point of having a very young population. You can take a couple of examples like f1soft, NCHL and a lot of these bodies which are coming up as startups. Given the high mobile penetration and the young population, the digital adoption is very fast. You see the transaction volume of ConnectIPS which has gone up many folds. That's one part.  The second part which is very encouraging is that the regulator's roadmap is also very forward looking. The recent regulation of interoperability is a big plus point and a big signal.

In the recent monetary policy, we admire the way the local banks have moved ahead. They have certain strategic advantages of having only Nepal to operate within. We have got multiple countries, multiple systems, multiple levels of integration. But what we are very proud of in Nepal is we are the first bank which has come out with API and integrated solutions for a lot of corporates. We are leading the way on a lot of initiatives with both the regulator and some of our partners here in terms of adopting new systems and practices. So, from that point of view, for us, it's twofold. One is bringing our best-in-class systems into Nepal. And the second is I think we also have to start looking at channels and partnerships. I don't think a bank can do it alone.

With the advancement of the digital revolution, how do you see the opportunities and threats? Especially in terms of the cryptocurrency issues, bitcoins and all that?
Let me start with threats. One is, there are many new ideas, adoption and practices where we have to be careful before we jump in because regulations are trying to keep up with some of these things and many have pitfalls. The opportunities are immense. Moving away from cash, getting cashless and realtime transactions. And it all leads to consumption, spending and the whole ecosystem becomes integrated.

Against that backdrop, you have things that need to develop very quickly, a national ID system. The Nagarik app is a great example. Overall, it is very positive because the entire ecosystem is getting integrated. You had RTGS coming in last year, there is connectIPS and there are wallets, and regulations are keeping pace. So, all in all, I don't see much of a threat. I mean threats are common to every other country, whether it's cybersecurity, AML financial crime, etc. Nepal seems to be moving very fast and in the right direction, at least from a regulatory standpoint.

What about the prospects and importance of sustainable finance in Nepal? How do you see the role of SCB?
This is a topic which is being much discussed. If I put on just the SCB hat, what is exciting for us is given the SDG goals everywhere, every country has announced a roadmap. There are new ESR and guidelines. Nepal has potentially something like $40-60 billion of investable opportunities across sectors which the regulators and the government have outlined. Our job is to showcase that across our network and also to the world because if we just plot the needs of our own bank in terms of a target, and if you just take the opportunities for investment and plot Nepal, we would probably trigger in the top 10 in our own network.

And against the backdrop, we always feel that Nepal can be a basket case. Because one is the immense hydro potential, which the country has and given our commitment to climate, Nepal can stand out because its clean energy. And then you have things like transport where if you see the government route back up to 2030, electric buses and all those kinds of things will follow. Simply put, the import basket could change considerably if the harnessable power increased, and then the dependency on fossil fuels comes down.

So, if you put all of this together, including agriculture, education and ecotourism, there are tremendous opportunities for investors, agencies and financial institutions to look at Nepal to meet their targets and goals.

In terms of hydropower, Nepal has been increasing production but has not been able to find the right market. India has shown interest but there is no breakthrough yet. What are your views on this?
I can't comment on that, because that's more of a political thing. But we feel that the industry is still very fragmented. The second is the financing, the way it's being financed probably needs to be relooked at from other opportunities like blended finance, different structures and bringing in green financing. And hence, it allows us to attract investments from a sustainable finance perspective, as well as to help Nepal achieve its goals in terms of energy and requirements.
It is said that many hydropower companies are in trouble now financially. Don't you think that will be a threat to the banks also because they have huge investment?
It becomes systemic which is why the recent monetary policy guidelines which addressed the specified sector requirements has brought in an element of fungibility between sectors. We feel that the sectors should be expanded. There is the Industrial Enterprise Act in Nepal which aligns to what the country wants to do in terms of economic growth. We feel that the sectors need to be broad-based and not just agriculture, energy and MSM. It can add a few more sectors and that will allow banks to diversify. Clearly the specified sector lending is something we strongly believe in and it's for the good of the country and economy. But we need some more sectors.

As you said Nepal's banking system currently is running under the very terrible stress of the loanable funds. How are you managing it?
Firstly, as a bank, we are highly capitalised. We probably have the highest capital adequacy ratio. Essentially banks need capital to grow. So, we are very comfortable. The second is, the structure of our balance sheet is very different to the local banks. We are very less reliant on term deposits, we are more into current and savings accounts which is the bread and butter of our business. So, our cost of funds is low. Yes, there is a tightness in the liquidity but, being an international bank, we have several other measures of raising liquidity. So, we are like everybody else in a tight situation but we are managing over this period. We feel that liquidity will come back at some point. But our way of managing through this phase is obviously very different. Given that we are an international bank and we have other options - bring in liquidity.

Do you think raising the interest rate will help ease the situation? What would your suggestion be to the central bank to manage the situation?
NRB has already addressed it in many ways. Today credit growth is anywhere around 26 percent which is very high. I think the monetary policy target was something like 15-16 percent. So, there will be a slowdown. Added to that is the way imports are being handled, the tariff, the margins, etc. It's like one cycle, it's one composite. I won't say a vicious cycle, but as GDP contracts, consumption comes down, imports come down, and there will be an element of arresting inflation and credit growth coming down. So NRB has taken the first steps. Now, the rates are an outcome. Banks are raising money at level because there is no liquidity. But the question is, are we attracting new deposits? This is cannibalisation. You might move your deposits from your bank to my bank because you're getting a higher rate of interest, or you might be moving money from your savings account to term deposits to earn more. But the system liquidity is still short.

I don't think saying that we will advise you is the right way because we always collaborate, we always discuss very openly our problems with NRB and we get a lot of help. I think what we need to start looking at is to slightly loosen it up. The interest rate management regulations need a bit of change, including risk based pricing. So, whatever you do, there is a net interest spread regulation. You have to operate on that. And you have a base rate mechanism. We have to decide which one we should use. Essentially, fixed deposit rates are an outcome or a reflection of how much liquidity is in the market. And that should be determined by the market. The rest should be capped. So, if a bank needs more funds, it needs to raise interest, which means that it also needs to raise its lending rates. And that will allow the market to define the rates eventually.

Many bankers attending the FNCCI event recently were telling me that the interest rate will go up to 15 percent. Do you believe the same?
In theory, you can't debate that. But we are still hoping there will be some form of intervention, at least in terms of expenditure. The government's budget is about something like $13 billion. Today, what we've seen is probably about 20 percent of the expenditure. Just look at the amount of expenditure which is held back. If it comes into the system, I think the liquidity problem will get tempered. And that should happen after Baishakh (mid-April).

Nepal is also facing a stress on its foreign exchange reserves. How do you view the way the authorities are responding to this?
Clearly, we are trying to slow down inputs. But at the same time with oil already at 100 dollars today as we speak, we need to find a way of raising dollars. But at the same time, if you look at remittances, the numbers went up. The other thing we need to remember is as the currency fluctuates, remittances increase. So suddenly, if the dollar is where it is, if I'm a worker overseas, I will want to send more money home because of the exchange. So, it has a dual effect. So, the government is taking the right steps in terms of curbing imports. We slid down very fast from our nine to 10 months cover to probably 6.2 months cover. It's not precarious. A five and a half months import cover is still good enough. And we think that probably Nepal will stabilise at that level. It would be worrying if the rate of decrease accelerates, but we doubt it will.

We see remittances are not coming from the right channel. Is there any solution digitally or policy-wise?
If you see in the external sector recommendations NRB has already made recommendations on the revenue side. The NRNs are the future of Nepal. You have a similar thing in Bangladesh and in India. I don't think we are solving the problem by just sorting out remittances because we became a remittance-led economy. We have to diversify towards an infrastructure-led economy. That is what we would push for and recommend.

What are the chances of SCBNL bringing in foreign exchange loans from its partners?
It’s nothing new. I can't get into details of the transaction but as an international bank, we do have the ability to raise funding. We are in talks with the regulator on developing some structures at this juncture. We've done it in many markets. I'm not sure you are aware of this fact that being the banker to banks, we bank all the banks in Nepal. There is a substantial amount of lending which happens to the local Nepali banks offshore to raise funds. So, which we are doing anyway, which comes into the balance sheets of the bank. To answer your question, it is already ongoing. Most of the trade, and the foreign exchange is clear to Standard Chartered. And we have a sizable portion of loans to all the local banks in our portfolio.

So, what do you suggest could be done to manage the frequent steep rise and fall in the interest rates?
One is, as we aim to develop financial markets in Nepal, we have to develop a transactable benchmark curve. There is no long-term benchmark curve or a bond market where we can benchmark pricing. Today, the treasury bills are very volatile. So, it's very difficult for banks to have a transactable curve which you can refer to. A reference curve has to be developed in partnership with the regulator where banks can benchmark their pricing. So that's the first step.  The second is, we will have to decouple certain things. Some will be market rate, and some will be based on a cost of funds or a base rate. That is the international practice and I'm hoping we get there in some way.

Some people are also suggesting credit rationing and the NRB is actually trying a similar line. What is your take on that?
I think we alluded to it that given the current regulations, there is a move to bring down credit growth rates.  We are already in the high 20s. It should come down to the high 10s. So that is an outcome of pricing. As loans get expensive, we are assuming people will borrow less. And also, in which category will people borrow. Will it be luxury cars? Will it be just cars? Will it be housing? And if liquidity is tight, where will people borrow from?

Talking about specified sector lending, we are bound by regulation like any other bank. As of January, we've met all our targets. It's an ongoing target. It keeps moving. There are sectors like MSME etc, which is a challenge for all banks. The new regulations or the recent monetary policy guidelines are much more forward looking because there's fungibility. It also recognises the kind of bank you are and how you should participate. I think that's a great step.

How is SCBNL investment in agriculture and hydropower? And how do you evaluate the prospects in such sectors?
We have met the targets and we will continue to meet them. The question is how do we meet them? That is very different from a local bank because our balance sheet sizes are different, our scale is different, and our participation model is different. And like I said that the directive for SSL has already gone through a bit of change. We are probably more keen on the agricultural sector because it's like being a force for good. Energy already has a demand and supply. We feel at some point of time, the regulations around energy will change because you can have only that many hydro projects and what if you can't transfer the power. Agriculture is the future. We believe both MSME and agricultural sectors are definitely the way forward.

Meeting lending requirements to agriculture is getting difficult for banks because there are very few commercial agricultural ventures. What is your experience?
There are challenges everywhere. The intent of the regulator is to do good for the economy. Within the sectoral targets, what needs to happen and probably is going to happen slowly is who participates and how that bank participates. If you look at the cooperative banks, they are also doing a lot of MSMEs.  ‘A’ class banks are also participating. So, there is a kind of unhealthy competition which is not required. Different categories of banks serve different purposes in the economy and the market. That recognition, I think, is slowly coming in. While the goal will be the same, the participation could change. Instead of going directly into that segment, we probably might risk participating with a bank which is participating in that sector. This is a different way of doing it. All of us can contribute, but the way we are contributing will probably change.

We all know that SCBNL is the only truly international bank operating here. So, when foreign banks were invited to operate here, the expectation was that they would help in export promotion, foreign investment facilitation and transfer of technology.  How do you evaluate the delivery of SCBNL on those parameters?
It's not something which has come to a stop that we have done so much. The basic fact is given the network we have, that is the biggest value we bring to Nepal. If you plot that to some of the FDIs which are happening from India, China, Japan and Korea, all the investments have come through Standard Chartered. So, it's a natural flow for investors. We are present in Africa, the Middle East and even in the sub-continent. So, that is the fundamental part.

The second is, the biggest value of what we do here is that we are the bank to the banks. If we were not there, surely there would be other ways of handling it. But the fact is that the entire correspondent banking business, clearing of dollars and 80 percent of Nepal’s trade goes through Standard Chartered in terms of documentation and LC. So, we take a lot of pride in being systemic from that point of view. The third is the entire space of the development organisation. We are a medium through which pension is paid to British workers which is a very big service. Our retail business is also being reshaped. We have a very strong retail business. While we only have a very few branches, we are more into the business banking and SME space also.

Can you elaborate more on your MSME business?
Banks define MSMEs differently. For us, business banking encompasses the sector between corporate and the lower end of SME. And that is a very sizable chunk for Nepal which is trading, imports, exports, and there are a lot of business houses. Our retail bank is more geared towards that in terms of lending, operating accounts etc. There are a lot of system solutions which we give.  We are a trade bank essentially. Given that it’s an import-based economy, we bank a lot of multinationals and a lot of other businesses. Our retail work is more geared towards the businessmen and business houses. And under that there is an ecosystem, whether it's personal banking, etc.

Nepali authorities have granted certain exceptions to SCBNL like the requirement of opening branches. How is your reach in rural areas?
Our question is, is it required? There are 28 class commercial banks. Are we going to fill that gap? No, because everybody is already looking at that. Second is our participation. As an international bank, we cannot have the same participation model as a local bank. And we are very open about it. We started by saying that we are the bankers to the banks. Our retail banking business is geared towards business banking. We do 10 other things; we even bank the regulator.

Our participation model has to be very defined, and you need to bring a certain amount of value and purpose into Nepal. We can't be doing everything. I don't think there are exceptions for Standard Chartered. There are probably items which are still open with the regulator and being debated. Our participation model doesn't define us opening a lot of branches. But who knows, we might open variants of branches in the future. But clearly the plan is to go to digital and find a partner. We might even partner with a local bank to expand our reach in certain segments. But what we need everybody to appreciate is that our participation model in Nepal is different. And we're not saying they treat us differently, but identify us differently. In other markets, foreign banks have different sets of regulations because their participation is very different. That's what we are saying.

Another question related to technology, banking service users in Nepal are suffering from the problems related to KYC requirements. How is your bank handling this?
We are in line with our global practices. In the defence of Nepal, I would like to say that the industry actually is not very far behind. The practices which NRB adopt are in line with any international standards. Today, I really don't see anybody complaining about KYC. If you are getting into a flight, look at the number of documents you are producing. You still need your ID, you still need your PCR, you still need your vaccine certificate, and everything. KYC is pretty standard. Everywhere you have to give your mobile number. What is good is that things like the Nagarik app and others are allowing eKYC. This will reduce a lot of problems. Make it easy as a touch point to upload your citizenship card or your tax card and move along very quickly.

SCBNL seems to be deriving good income from fees and commissions. A lot of this may be coming from international transactions and government bills. What is the share of bill discounting with such revenue?
Of the trade volume in the country on a direct basis, it can’t be more than 2-3 percent. But if you look at the whole ecosystem of Nepal, probably 80 percent go through the SCBNL system because all of them have correspondent banking, and we are their bank, eventually. Do all the transactions earn fees for us? No, it doesn't. So, at a certain level, we are at par. The international business is very different because local banks have international needs and it is done through our network. It doesn't reflect on our books.

Would you like to add anything else before concluding?
The good news is that it's a very sound banking industry. We still haven't seen any stress. We have a very good regulator, a very proactive regulator. The recent announcement of monetary policy defines that the fundamentals are strong. A lot of the mergers are happening and a lot of the Nepali banks are adopting a lot of new digital practices. So, everything is in the right direction. I think what only remains is the development of financial markets, whether it's capital markets or having a bond market, swap mechanisms and hedging mechanisms, etc. Once the capital markets and the financial markets develop further, there will be further capital infusion, and banks will be able to rise to the occasion. 

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