“There is no point in announcing monetary policy with elements contradicting the fiscal policy”

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 “There is no point in announcing monetary policy with elements contradicting the fiscal policy”

Dr Chiranjibi Nepal
Nepal Rastra Bank

Nepal Rastra Bank (NRB) received both praise and criticism from various quarters for the Monetary Policy of FY 2016/17. Nevertheless, Dr Chiranjibi Nepal, Governor of NRB is quite hopeful about the policy which he thinks can effectively support the country’s economic recovery.  He has been in the post since March 2015 and has introduced two monetary policies. In an interview with Sanjeev Sharma of New Business Age, Dr Nepal talked about the various provisions in the policy, NRB’s efforts to stimulate economic growth and the banking sector’s ongoing consolidation. Excerpts:

Your tenure as the NRB Governor during the past one year must have been quite challenging as the country went through one of the most tumultuous periods in its history. What do you think you have achieved after your appointment? 
I joined the central bank at a time when the environment was largely gloomy which is now becoming more optimistic. The new capital plan for BFIs is running successfully. All BFIs are pursuing their paid-up capital increment targets. Some are achieving it through mergers and some are deploying other methods. The capital increment has raised the level of confidence in the financial sector. This has positively impacted the stock market. As share investments are rising, people are getting richer and investments have increased. 

The new monetary policy aims to tame inflation at 7.5 per cent and targets an economic growth of 6.5 per cent. Don’t you think that these targets are unrealistic in the present context?
The inflation target is not hard to achieve. It is down from last year’s double digit to 8.6 percent. Both imports and exports have increased. This indicates a rise in economic activities that had been stalled for the whole of 2015. We have set the inflation target for the current fiscal year by observing that the current gradual increase in economic activities will continue and the country’s economy will eventually come back into shape.  We do admit that the inflation and GDP growth rate targets are ambitious. It is true that there are various factors that can obstruct us. The capital expenditure, for instance, is still low. Nevertheless, we need to acknowledge that the policies are guided by ambitions. The monetary policy for this FY is supportive to the fiscal policy of the government. We are hopeful of achieving these targets. 

What are the key reasons behind the decline in the inflation rate?
Various factors are contributing to the gradual decline in consumer prices. Economic activities are rising.  Internal consumption has increased rapidly. Similarly, the domestic production activities have resumed. Likewise, it is also due to the spillover effect from India where the consumer prices have largely remained under control for the last two years. 

What is your comment on the criticism that you towed the line of government in the monetary policy?
Monetary policy everywhere in the world technically assists the fiscal policy. Any central bank has a role as an economic adviser to the government and advises the executive body on the budget. It is important to formulate a monetary policy which supports the fiscal policy. We are doing the same here. There is no point in announcing a monetary policy with elements contradicting the fiscal policy. There are some examples in the past where we had a monetary policy announced before the budget which was meaningless.  

Your policy of forced merger among banks is criticised. Don’t you think that it is time for NRB to rethink this strategy?
NRB has not imposed any policy of forced merger. We have just asked the BFIs to raise their paid-up capital. The institutions can meet their capital targets through various means. Mergers are just an option. We are just facilitating the capital increment of the BFIs. Mergers make it easy for the central bank in terms of regulation and supervision of the sector while also adding transparency and strength to the business of BFIs. We are happy with the progress of BFIs to meet their capital targets. 

It will ensure a sound health of the overall banking sector which will bolster the trust of the general public in the banking industry. BFIs have been the top earners in Nepal over the years. Being the largest profit makers, they need to make sure that their institutions are running in sound health and are able to absorb the shocks, if an event such as an economic or financial crisis occurs. 

BFIs need to raise their paid-up capital levels with the expansion of the country’s economy.  The paid-up capital requirement, for example, was Rs 2 billion for ‘A’ class commercial banks when the size of the country’s GDP was Rs 624 billion in 2007.  Now, since the formal size of the GDP is more than Rs 2200 billion, how can the capital level be the same? Paid-up capital increment is elemental for BFIs to become sustainable in an economy of that scale. It will help banks to finance large projects and become self-reliant economically. The capital plan is also important to take Nepal's banking industry to the international level. Nepal's BFI sector has the lowest level of paid-up capital in the whole of South Asia.  Meanwhile, it will also send a message to international investors that Nepali banks are reliable and they can financially support foreign investors after they start their business ventures here. 

This year’s monetary policy has set a spread rate cap of seven per cent on the lending of microfinance companies. What is the reason behind the policy tightening?
Microfinance institutions are meant for deprived people. High spread rate will obstruct the core objective of MFIs to reach out to such a population due to the overtly high interest rates. We have felt the current spread rate cap of five percent for commercial banks to be still higher compared to international standards. 

Nevertheless, don’t you think that microfinance is more about access to finance than cheaper loans?
Both access to finance and cheaper loans are the two core objectives of microfinance companies. It is inappropriate to levy extremely high interest rates to the marginalised population by citing access to finance as the only core objective of MFIs. The central bank has faced and strongly refuted such arguments. Many people have blamed NRB of providing licenses to feudal lords who extort money from the poor. We have long cautioned the microfinance companies to change the way they work. The hue and cry ultimately led the government to form a committee that suggested keeping the interest rates of loans from microfinance companies less than 18 per cent. 

But MFIs do not have a non-banking income source like commercial banks which makes it difficult for them to sustain in the long run…
The monetary policy has set a 7 per cent spread rate cap on the lending of MFIs due to the higher costs of capital for such institutions. We do not see any problem for MFIs to operate and expand their activities within this ceiling. 

Transparency and accountability are a must for all types of financial institutions as they start and operate their business with the public's money. There is a triangular setting in the Nepali banking market where banks put money in their subsidiary microfinance companies and then the money is sent to the cooperative institutions. This causes various anomalies in the country’s financial system and obstructs MFIs from achieving one of their core objectives of access to finance. We can see that the activities of many MFIs are actually focused on cities and nearby areas rather than the remote parts of the country. We will soon be starting to map the MFI sector and resume the licensing process in a bid to persuade the microfinance companies to go to remote areas where people have a very low level of access to finance.  One of the ironies is that 60 per cent of the country’s population still does not have access to the banking system.  

Globally, financial institutions are considered as public institutions and people who operate such organisations are trustees even though the investments are private. The case of 11 BFIs that are declared ‘troubled’ can shed light on this issue. Their failure was primarily due to the mismanagement caused by attempts to run them like private firms.

There are also various problems in the country’s financial sector due to the cooperative institutions. NRB in the past had also tried to bring them under its radar. What can be done to effectively monitor and regulate these institutions?  
There have been many irregularities in the cooperative sector despite the contributions of the cooperative institutions to the country’s financial sector.  Nevertheless, our area is confined to the BFI sector. The laws do not mandate us to look after the cooperatives. Also, it is not possible for us to regulate nearly 30,000 cooperatives. It has been quite challenging for us to maintain the sound health of the BFI sector. Similarly, it will be difficult for the cooperatives to survive if NRB starts to regulate the sector due to the strong micro-prudential regulation mandated by the Basel III framework. We have suggested that the regulation of the cooperative sector should be carried out through a second-tier body.  NRB is always ready to support such an entity. 

With the banking industry strongly disagreeing with the provision related to direct lending to the deprived sector, don’t you find this will be difficult to implement?
The monetary policy was announced publicly. We have not received any formal complaint from anyone regarding the policy’s provisions. Those who are objecting should come and talk to us instead of expressing their dissatisfactions across various forums. The provision related to deprived sector lending envisions increasing the accessibility of the marginalised population to the banking sector. We believe that it will have a positive impact in the long term. 

The new monetary policy clearly intends to tighten the flow of BFI money into the stock market. What led NRB to step up to curb the BFIs financing the stock market?
It is pleasing to observe the growth of the stock market and investors becoming richer due to the increasing share transactions. However, such growth needs to be sustainable in the long run. The provision aims for a healthy growth of the country’s banking and capital market. It should not be taken as curbing any financing activities. Since the banking sector comprises the largest portion of the Nepali stock market, it is important that both the banking industry and stock market are in sound health. The provision aims to reduce the risks to the existing investors and makes it easy for new investors to join the market. There are previous examples where NRB has stepped up to protect the financial system from various associated risks. One such example is the cap on the real estate lending of BFIs. 

What is the idea behind establishing an interest rate corridor in the monetary policy? How will the new policy help NRB to achieve price stability?
 We are lagging far behind in terms of meeting international standards. We have long tried to establish the interest rate corridor. The market will now determine the interest rate through the repo and reverse repo. It will help us to adopt advanced and scientific methods. It gives a message to the global financial system that the central bank of Nepal is also following the recent international trends. Meanwhile, we have also addressed the demand of the Nepali banking sector which has long asked for an interest rate corridor for stable interest rates.   

Economic recovery is still sluggish despite activities having picked up in recent months. What role is NRB doing to revive the economy?
Our role is to facilitate the economic activities in the targeted areas and groups in order to stimulate the economy. We have put in place refinancing facilities at subsidised rates in the monetary policy to open hotels in the mid-hilly region. Similarly, refinancing facilities at one per cent interest rate for businesses in the most remote parts of the country is also in place. Likewise, we have sped up the subsidised agro loan scheme announced earlier by the government. All these efforts are stimulating the economy badly hit by last year’s twin shocks. 

NRB saved a total of Rs 876.9 million in the printing cost of bank notes in 2015 and 2016. How was this possible despite additional security features and the sharp depreciation of the Nepali currency against the US Dollar compared to earlier years?
We have maintained an optimal level of transparency regarding the printing of notes. From bidding to awarding the contracts, the whole process was highly transparent. It is interesting to note that the same company had printed our notes in the earlier years at higher costs. 

A Supreme Court ruling has ordered NRB to forward the bank details of some Nepalis allegedly involved in the note printing scandal. Has the central bank forwarded the bank details to the Australian authorities investigating the case?
We have not received the court’s order till date. Once we get the order, all the bank details of the individuals will be forwarded to the Australian authorities. 

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