“Focus on work rather than lip service”
In Nepal, there is a tendency of revolving around the same issues instead of searching for the options to come out of the troubles. We have been continuously hearing about issues like sluggishness in capital expenditure, swelling trade deficit and distributive budget since 2048 BS. Politicians and bureaucracy have remained the same, but there are no efforts for improvement. Lip service won’t solve the problems. The main problem in the capital market at the moment is the plunging share market and credit crunch. The authorities concerned have paid no attention to the operational issues for the improvement of share market. On the other hand, BFIs have been facing problems in both deposit and investment. Many problems are primarily at the policy level. Talking about CCD, our banks don’t have good quality deposits or loans. There is mismatch in assets and liabilities of the banks. The interest rates are high which creates problem for other economic sectors. The non-performing asset (NPA) level of banks is likely to increase in the coming days. Recently, the price of agricultural products and construction material increased by 25 and 20 percent respectively. Overall, the probability of consumer prices increasing to double digit is high. Improvements in share market and ensuring sound flow of capital have become immediate necessities to mitigate the long-term adverse impact on the market due to recurring problems.
“Rural areas are big sources of capital for BFIs”
There is a huge inflow of money in rural parts of Nepal as remittance. BFIs need to reach every nook and corner of the country to bring the money to the banking channel. Similarly, flourishing entrepreneurship in rural areas also presents opportunity in terms of deposit collection and investment. However, due to the relatively low level of BFIs’ presence and financial literacy, the money in the rural areas is outside the banking channel.
Village dwellers in Nepal still prefer to save their money in a traditional ways. So, financial literacy awareness programmes along with expansion of BFI networks have become much important in the present day context. If we are able to bring money of rural residents into banking channel, it can help to increase the capital of BFIs. This will help to solve the shortage of lonable fund in the banking sector.
“Banks need Rs 200-300 billion additional money immediately”
There is no alternative for us to borrow money from foreign banks to ease the problems in liquidity. NMB Bank has signed a loan agreement with the International Finance Corporation (IFC) in this regard. Other 4-5 international banks are also in the pipeline for such borrowing. The central bank’s decision to allow Nepali banks to avail foreign loans in convertible foreign currency is a welcoming initiation. Now it will be easier for us to borrow foreign money. Nepal banking system needs Rs 200-300 billion additional money immediately.
NMB Bank has adopted the principle of “value based banking”. Under this, our focus is on increasing investments in productive sectors. To mitigate the risks posed by fluctuation in foreign exchange rates, there should be an arrangement of hedge fund.
“Pressure of high intermediation cost”
The recurrence of problems in liquidity management is a result of the priority of successive governments in state revenue growth neglecting the country’s GDP growth. It is an irony that the government’s revenue growth target is over 30 percent in a country like Nepal where the GDP growth is less than seven percent. Liquidity crisis is not only the problem of banks. It is in fact a complicated economic problem which should be addressed through policy measures. It has become clear that commercial banking is not enough to run the Nepali economy. Now our focus should be on attracting FDI.
The desired economic development will never be achieved if the financial institutions keep increasing the interest rate on loans. The supply of money in the stock market has been very high against the relatively low demand. The central bank hasn’t been able to show its vigilance in this regard which has led investors to a difficult place. The cost of intermediation has increased too high and the authorities are doing nothing to ease the difficulties of investors. Either the existing stock market should be managed well, or establishing a new stock market in the country should be allowed.
“Need to facilitate mobilisation of foreign capital”
It has become important to find short-term and long-term solutions to solve the problems in the banking sector. Fresh capital can come into the financial market if there is an arrangement for government offices to open their accounts in the commercial banks.
They are allowed now to have accounts only in central bank. This is likely to ease the problems in liquidity to some extent. However, it can only be a short-term solution and BFIs will need additional capital in the long-term.
The government and Nepal Rastra Bank (NRB) should make some policy reforms to mobilise domestic and foreign capital. Domestic capital won’t be sufficient for us. So there is a need to facilitate mobilisation of foreign capital.
“Mounting challenges to overcome”
The country’s economy is in a precarious condition. The banking sector which is one of the major pillars of the country’s economy has been facing mounting challenges at present. For the business community, the terms ‘shortage of lonable fund’ and ‘liquidity crisis’ carry the same meaning. Nepali banks in the recent years have become much aggressive in terms of earning profit. No other business sector in Nepal can match the profit levels of banks at present. And, the banks have invested huge amount of money in unproductive sectors to earn profit. This has caused expansion of credit without commensurate increase in deposits.
The banks were unable to maintain the CCD ratio. The sluggish deposit growth has been the reason for banks to compete in interest rates. Their unhealthy competition is among the major factors attributing to the current crisis.
The reliance on import has been another reason for the problems in liquidity management. Imports are the main source of state revenue. The government doesn’t want to lower the imports as there is no alternative for this.
The implementation of the federal system has also put pressure on the government’s revenue source. The Ministry of Finance has targeted revenue collection of Rs 1.2-1.3 trillion this year. Meanwhile, the size of the country’s formal economy stands at Rs 2.6 trillion. We don’t know the exact size of the informal economy. According to the World Bank, 35 percent of Nepal’s economy is informal. In this situation, a big question lies ahead to achieve the sustainable economic growth by always depending on import.
Huge investments are required in the local and provincial levels. Now, the government and the central bank need to seriously think about this. People have stopped depositing their money in BFIs due to the anti-money laundering (AML) arrangements that require depositors to verify the source over Rs one million. Many people don’t have documents to verify that their money isn’t generated from illicit sources. This is another reason for sluggish deposit growth of banks.
“Mishandling problems in liquidity can jeopardize the overall economy”
We need to tread with caution as the problems in liquidity are not limited to the banks. Mishandling the situation can jeopardize the overall economy. To mitigate the risks, both government and Nepal Rastra Bank (NRB) should have special roles. If policies are the hurdles, then the government should amend them.
We also need to be clear about the nature of the current problem in the banking system. Many say it is not a problem of liquidity. But banks say they don’t have enough money to lend. No country in the world faces shortage of loanable fund under normal circumstances. I think, we are yet to face the problem of liquidity. The banking system can have additional Rs 154 billion as loanable fund if the CCD ratio is removed and only CRR and SRL are used for control. However, such a move can only provide temporary relief. Therefore the focus of all stakeholders should be on bringing foreign capital to address the current problem in the country’s banking sector.
Our economy is yet to become vibrant. The money spent in the elections and for other purposes is yet to come to the banking channel. Cash transactions are still preferred across the country.
In a country where even the young generation is not used to the digital banking and transaction, it is quite difficult to persuade the old generation and people living in the rural areas to put their money in bank accounts. So, there is an urgent need of raising financial literacy levels of Nepalis by organising different activities across the country. Doing so will ultimately help in increasing the supply of money in the banking system.
“Savings interest rate needs to be on-par with inflation rate”
The new minimum paid-up capital requirement is a factor contributing to the current crisis. The banks aggressively invested in different sectors in their paid-up capital increment drive.
They focused on investing rather than increasing the deposits. The central bank should bring policy to address the problems of depositors. Interest rate on savings should be at par with the inflation rate. This will be instrumental to achieve the interest rate stability.
It is important to consider that if banks invest in the unproductive sectors, the money will not return to the banking system. The interest rate on savings should not be less than 5-6 percent on average. Similarly, interest rates on loan should also be stable. It is not appropriate for banks to increase the rate to 12-13 percent.
Besides, the government also needs to concentrate its focus in controlling the informal money transfer system or ‘hundi’ which is the main channel for the flight of capital from the country. In the meantime, the authorities also need to monitor the cooperatives that have been handling a huge chunk of money.
The central bank should not set a ceiling for banks to avail foreign loans. The limit for commercial banks to borrow money up to 25 percent of their core capital in convertible foreign currency from foreign banks needs to be removed.