“Banks are in a blissful slumber. They need to wake up.”

  10 min 26 sec to read
“Banks are in a blissful slumber. They need to wake up.”

Dr Chiranjibi Nepal was appointed Governor of Nepal Rastra Bank in March, 2015. Dr Nepal is a prominent academic who has worked with the World Bank as consultant and coordinator, Asian Development Bank as consultant, and the Higher Secondary Education Board as director. He has also worked as an advisor for various ministries, including the Ministry of Finance and served as chairman of the Securities Board of Nepal (SEBON). Abhaya Raj Joshi of New Business Age talked to Dr Nepal about his priorities as the chief of Nepal’s central bank and the monetary policy he recently presented. Excerpts:

When you became governor in March, you said you would work towards financial stability. What steps have you taken in that direction?
When I became governor, I said that financial stability was my main objective. One month into my tenure, the earthquake took place, and the country had to go through a difficult time. Even during such a difficult time, BFIs were able to provide good service. This increased the general public’s confidence in banks. Then the monetary policy, my first one, took steps to ensure financial stability; the main objective was to make the banks strong so that they do not fail and the people’s money is in safe hands.

The central bank wants an end to the situation in which it has to send its staff to improve the condition of problematic BFIs. What is happening now is that after the central bank improves the condition of a problematic bank, it hands over the BFI to the same group of people who were responsible for the failure of banks. 

The best way to avoid the situation was to increase the minimum capital requirement. We have the lowest capital requirement for BFIs in the whole of South Asia. We have numerous BFIs. Even after so many mergers of the past, the number stands at 195. But they have not been able to provide services in rural areas. Recent data shows that 40 percent of the people still lack access to banking and finance. 

Also, we have to look for funding from the donor community for big projects. To even start a 1 MW project, banks need to form a consortium. This has led to a situation in which the people’s savings are not safe. When the banks have bigger capital, people have confidence in the banks and they become competitive. This is the basis of financial stability. We want Nepal’s financial sector to be recognized as a strong one in South Asia. When that happens, foreign banks can also come in the market.

What according to you are the indicators of financial stability?
I would consider people’s access to BFIs, the banks’ capacity to finance big projects, and how solvent they are. If we consider these criteria, we can say that we have a lot to do to improve financial stability in Nepal. When a bank fails, the government has to rescue it; this has a direct effect on the general public.

In 2007, when the GDP of Nepal was around Rs 624 billion, the central bank raised the minimum paid-up capital for commercial banks to Rs 2 billion. In the next two years, the size of the GDP is going to increase to Rs 2800 billion. So the economy of scale is going to increase. But we were not thinking big, this put the people’s money at risk.

One concern that many bank CEOs have raised is that when the banks become big, they will not be able to provide return on investment as they have been doing now.
That is why banks need to invest in R&D. That was the reason the Reserve Bank of India appointed forty year-old Prachi Misra to carry out R&D. Now our banks are in a blissful slumber. They need to wake up, and not just rely on making profit from the spread rate. There are so many investment avenues available in Nepal, where every sector is virgin. I say that you can make profit by investing in any sector in Nepal, if you have the patience to do so. Even as we say that the situation is not good for investment in Nepal (due to the quake and delay in the constitution), banks are making profits to the tune of Rs 23 billion each year. If you invest in other countries, take for example India, you need to create your space, but here it is easier.

Bankers also say that the liberal licensing policy had helped increase people’s access to banks. But these gains could be reversed if banks focus only on big projects.
Take, for example, a bank financing a big hydroelectric project. The project will create employment opportunities for the local people, and roads will have to be built to access the area. This will open the area to banks, and more banks can do business there. That is how financial inclusion can improve, even under big banks

Why haven’t any foreign bank opened its branch in Nepal?
We made legal arrangements for foreign banks to come to Nepal in 2000. I would say they haven’t come because of the lack of coordination, and in part due to capital. Even when we talk about South Asia, our banking system is weak, in terms of both capital and human resource. International banks want financial stability. When our banks become big, they will catch the attention of foreign banks, and they may be interested in opening a branch in Nepal. 

The problem was that we got engrossed in internal things such as saving finance companies from collapsing. The internal concerns had prevented us from focusing on what was going on in the international arena.

The function of Nepal’s central bank has to be the same as the central bank of any developed country; its function is to track the movement of money and meet international obligations. But because we were so busy with internal concerns, we could not tap into the international polices — the best example for this would be the size of our paid-up capital. Now we are working on a five-year strategy to drive the financial sector forward.

You mentioned the central bank’s five-year strategy. What are its features?
First of all, we want our macroeconomic analysis to be based on the ground reality, we want to work on financial stability and improve our technology. Introduction of chip-based cards is an example. 

Because of our backwardness in technology, an IT professional from Gorakhpur, an underdeveloped part of UP, could withdraw crores from our ATMs. This shows how weak we are. The other things we want to focus on are human resource and physical infrastructure. We want to upgrade them to an international standard.

Are all these policies in line with the central bank’s mission to move towards universal banking? When the bank implements universal banking, what will happen with the development banks?
Universal banking is a long-term objective. We will reach there, gradually. We have not said that BFIs should go for mergers to meet the capital requirement. They can issue right shares, FPOs and even get investment from abroad. All we want is the people’s money to be secure. Those who can comply with the capital requirements will stay.

The central bank will not speak on what the banks need to do. They are totally free to decide. There are people who have been waiting for seven years to become bankers, and they have a lot of money to invest. 

There were reports that some foreign banks have shown interest in investing in some problematic banks in Nepal. What is the progress on that front?
Yes, there are two groups (one from Japan and the other one from Europe) that have shown interest in some problematic banks. I won’t tell you the names, but yes the process will soon conclude. This shows that the banks became problematic not because of the business climate, but because of individuals. We want bankers to focus solely on banking, and not on running industries or hotels by using the people’s money.

The new policy came at a time when banks were relatively stable and moving towards Basel III compliance. So why was the central bank in a hurry to increase the capital requirement? Was this done to force banks into entering into mergers?
Just a while ago, I met the CEO of Standard Chartered Bank. He was saying that he wants some more time. According to international norms, banks get around 15-18 months to raise their capital. In our case, we have given two years. You could take the examples of Malawi and Zimbabwe for this. 

I have told the CEOs to explain to the investors that now their investments are scattered, and they need to worry about each small investment. But after they become big, they can concentrate on big investments. None of the CEOs have complained about the policy, the only thing they have said is that two years may not be enough. But now all of them are happy.

In the past we have seen the monetary policy’s details leaked before its announcement. Did this happen this time also?
There were times when the newspapers would publish the details of the monetary policy even before it was announced. I remember a governor saying that he was reading out the policy just for the record. But this time, we kept it confidential. Even when the press asked the board members a night before the policy was due, they told the press that they were still discussing it. But we had finished the discussion a day in advance. If I had investments in banks, I would have been weak. But I do not have any. Some of my friends and family were angry at me for not hinting at the policy change. But nothing should come at the cost of the country’s financial stability.

But the central bank made the decision without consulting the stake holders. Isn’t this against participatory decision-making?
It is up to the central bank to ensure financial stability in the country. While taking some decisions, if we adopt the participatory approach, we will not be able to meet our policy objectives. Can you tell me how the participatory approach has helped Nepal get a new constitution?  I have been with the central bank for just over four months, but there are people who have been here for over 32 years. Even they have applauded this decision. 

This year, bankers, media and big investors, who would get first-hand information on policy changes, did not get any. So, they were unhappy with the new policy. 

The central bank has recently taken up a risk-based supervision approach. Was this done because the central bank assessed that BFIs in Nepal are at risk?
We saw that we could not get necessary information through the compliance-based approach. Under the risk-based approach we can assess the banks individually and identify what part of their operation is at risk. We have even developed new parameters for this.

Like in the past, Nepal’s trade deficit is soaring. The current account is in surplus just because of the remittance. The IMF has been saying that the Nepali rupee is overvalued. Are there any plans to devalue the rupee?
I don’t think we have the products whose exports could be increased by devaluation. There is no possibility of devaluation. But as per our policy, we are conducting a study on this.

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