Nepal Rastra Bank’s continued focus on controlling bank lending to unproductive sectors has been causing disruptions across various areas of the Nepali economy. Till recently, such disturbances were only in areas that troubled the banks and businesses. Now, the ripples are being felt also in the government coffers. The Ministry of Finance is learnt to have asked the central bank to revise its policy to control bank lending for private cars as the Ministry has noticed that the tax collection from automobile imports and sales have dwindled.
The central bank is, therefore, expected to ease its lending guidelines to the banks while announcing the Monetary Policy for the new Fiscal Year that starts on July 16. But if the policy revision centres only on easing auto loans, that will not be enough. The central bank needs to revisit its entire definition of productive and unproductive sectors which it has been following for the last 4-5 years.
In trying to designate sectors as productive and unproductive, NRB has been causing a lot of confusion. NRB has even gone to the extent of violating a law adopted by the Parliament. The case in point is the Industrial Enterprise Act 2073 which specifically states that the construction industry is a national priority industry (which clearly means that it is a productive sector according to the Parliament). Though this law has put the construction of residential and business complexes under the construction industry category, NRB has been repeatedly saying that both of these construction areas are unproductive. And it has capped the bank loans for them.
NRB has caused confusion by specifying certain sectors as productive and asking the banks to exceed a specified target of lending to such sectors. Such specified sectors are agriculture, tourism, hydropower and small and cottage industries. Though NRB has not said that the other sectors such as manufacturing are unproductive, businesses are complaining that the banks are treating even cement manufacturing as unproductive. NRB needs to clarify this.
Better still is to entirely abandon this sort of impractical as well as conceptually wrong productive-unproductive dichotomy. If we accept cars as unproductive, how can the NRB and the government offices be allowed to buy cars for their officers. If the government agencies need to give cars to their senior officers, the private sector businesses too need to give cars to their senior officers. This decision should be left to the respective private sector companies and individuals as it is their money that they are spending. More logical is to control such spending by the government agencies as the money they spend does not belong to the individuals who make such a decision, but comes from the ordinary people who gave this money to them as taxes so that they can spend it most productively. The same logic applies also in the case of housing. Furthermore, housing is quite a productive investment as it has positive multiplier effects across different businesses such as the manufacturing of building materials, jobs to the construction workers etc.
Another type of loan classified by NRB as unproductive is the so called “margin type loan” which is a loan issued against the security of share certificates of companies listed in the stock exchange. There are two aspects to this. One, the banks are giving this loan as the stock brokers are not allowed to do so. Had the stock brokers been providing this ‘margin’ loan, banks would not be giving such loans and there would be no need for NRB to worry. Second, such investment is quite productive for the individual whether he/she uses the proceeds of such loans to buy additional shares or invest in other assets. In both cases he/she earns additional income. Any investment that earns income should be treated as productive. But will the NRB follow logic and entirely abandon this confusing and illogical practice? Or will it simply bend to the order of the Finance Ministry and ease auto loans only? The latter case will be further proof that the concept of central bank autonomy has no place in Nepal.
Madan Lamsal
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