‘I don’t agree with scrapping provisions like CCD ratio’

Nepal Rastra Bank is preparing to issue monetary policy for the next fiscal at a time when banks and financial institutions are competing to attract deposits while high lending rate and credit crunch have adversely affected the borrowers, as the cost of doing business has gone up. Pushpa Raj Acharya of The Himalayan Times caught up with former governor of central bank Tilak Rawal and former president of Federation of Nepalese Chambers of Commerce and Industry Pradeep Kumar Shrestha to learn how the upcoming monetary policy can address these issues. Excerpts:

Photo: Balkrishna Thapa Chhetri/ THT

‘I don’t agree with scrapping provisions like CCD ratio’

— Tilak Rawal

High lending rate of banks has adversely affected the borrowers, including industries and businesses. What should the central bank do to cope with the challenge through monetary policy 2018-19?

Both the central bank and the government have to do their bit to address this challenge. This problem has emerged due to low deposit growth against high credit demand. Banks have been borrowing from the depositors at 12.5 per cent interest to cater to the demand for loans. While the demand for loans has increased exponentially, deposit growth has remained slack due to slow capital spending of the government, sluggish export and weak growth of remittances. Against this backdrop, the central bank is framing the monetary policy, which must address the current crisis because our production is becoming more and more uncompetitive. I hope the central bank will introduce some instruments to ease the situation. Apart from repo, the central bank can bring down the threshold of cash reserve ratio, expand the size of refinancing window, among others. The government has to support the central bank to expand the size of refinancing and expedite the physical works to spend capital expenditure.

Normally, the government’s expenses increased towards the end of the fiscal year and the credit rates used to come down. Why are the rates still high this fiscal?

It is because the lending capacity of the banks has gone up along with the increase in their paid-up capital, but the availability of resources (deposits) is low. The finance minister has presented a gloomy picture of the economy, which has also created a havoc as he presented the database in different intervals. There are deep-rooted problems also in the external sector. The trade deficit of this fiscal is expected to be close to the size of the budget (based on the revised estimates) of this fiscal. Through the mid-term review of the budget, the size of capital expenditure has been revised by around Rs 100 billion. Banks have floated credit up to the permissible ceiling of 80 per cent of the credit to core capital plus deposit ratio assuming that the government’s expenditure will rise. However, government has revised the spending target and brought down the budget size instead of spending the available resources.

Banks have been demanding removal of the provision of 80 per cent CCD ratio through next year’s monetary policy. Do you think it’s a good idea to do so?

I don’t think so. Such provisions are introduced for financial stability and make the banks and financial institutions efficient and keep them in discipline. The central bank should seek the best possible solution to address the challenge without hampering internal and external sector stability.

The fiscal policy has spoken about channelising the resources of the financial sector to the productive sector. Earlier too, the central bank had introduced a mandatory provision for banks to float at least 25 per cent of their total loan portfolio to productive sector. Now, banks have been asking that the given target be relaxed. What is your view on the central bank’s direct lending policy?

The monetary policy should be aligned with the fiscal policy and the financial institutions must help to execute the border targets of the government. Banks and financial institutions have to cross-subsidise low returns of the productive sector lending from the high returns of the realty, automobiles or margin lending. However, the government and the central bank should also acknowledge that the banks and financial institutions are not charitable organisations. They should also be given the freedom to lend to high profit-making areas considering the risks. If the regulatory body tries to squeeze them, it will create setbacks. Shutdown of the stock market for more than a day is an example of that and the government finally had to stall its decision of changing the method of calculating capital gains tax following the agitation of investors.

The fiscal policy has spoken about providing loan against the collateral of educational certificates, loan in group guarantee for youths, among others. Do you think these schemes are implementable?

All the announcements made by the government will not be implemented. Similar announcements were made in the past, but they were never implemented. People have expected a lot from the majority government of Prime Minister KP Sharma Oli, which is why the federal budget 2018-19 presented by Finance Minister Yubaraj Khatiwada has tried to persuade the voters that the government is really doing something for them as promised. But there is no synchronisation among the left alliance manifesto, long-term plans and the federal budget 2018-19.

The private sector is expressing concerns that the finance minister seemed much rigid in extending fiscal incentives to the private sector and that his involvement in providing final shape to the monetary policy could dampen their expectations. What are your expectations from the monetary policy?

I have nothing personal against the finance minister. We had worked together in the central bank for a long time. But the private sector is pessimistic with the budget 2018-19, which the leaders of private sector umbrella bodies have openly shared in public forums. I believe that the monetary policy will address the current challenges of credit crunch and high lending rates. I would like to suggest the central bank governor to come up
with the best possible solutions and also convince the finance minister as the governor of the central bank instead of accepting the high-handedness of the finance minister in formulation of monetary policy.

Photo: Balkrishna Thapa Chhetri/ THT

‘If there is no business, how will the banks sustain?’

— Pradeep Kumar Shrestha

As Nepal Rastra Bank is framing the monetary policy for the next fiscal, what do you suggest to the central bank to curb high lending rates?

Cost of doing business in the country has surged due unpredictable and high lending rates of banks. Many private sector-run projects designed based on the assumption of certain interest rate have become inviable due to high lending rates and credit crunch. Many projects that have not been initiated have remained standstill. I think the central bank can intervene in the base rate of the banks by providing justified interest rates in the treasury bills. Justified interest rate means up to the interest rate that banks are paying to the depositors because due to low interest rate provided by the central bank, banks also adjust the interest rate they obtain in T-bills to the base rate. Another fundamental thing is that the monetary policy of the next fiscal should bring down the requirement of cash reserve ratio. Another major aspect is interest rate spread. Lending capacity of the banks have gone up along with increase in paid-up capital and the income of the banks from interest rate spread has gone up substantially along with the rise in lending capacity (volume of loan). If bank ‘A’ used to issue credit of Rs one billion and earn from five per cent interest rate spread, its income is doubled if the bank floats credit of Rs two billion after the increment in paid-up capital. So, the monetary policy must think about bringing down the interest rate spread.

NRB has been saying that the lending rate hike is not as severe as discussed in the public sphere as the refinancing fund of Rs 20 billion has not been utilised properly. What do you think?

Refinancing facility of the central bank is not a practical solution because banks have said that it is difficult to utilise the facility. Moreover, most times a borrower does not even feel the lending rate is relatively cheaper due to the refinancing window of the central bank because the share of subsidised credit in the total volume of credit is negligible. The central bank needs to expand the size of refinancing facility and expand a single borrower limit so that a borrower can get at least one-third of the total loan under refinancing facility of the central bank. If the central bank holds discussion with the industrialists or businesses, it would be able to understand how severe the problem is.

Private sector — traders, industrialists — allegedly pass on all the additional costs to the consumers. Do you agree that the consumers should ultimately have to pay the price of high interest rates?

I won’t claim that the additional costs are not passed on to the consumers. However, the traders cannot pass all the cost to consumers because the ground reality is that we share an open border with India and if the price of goods is increased substantially, unauthorised trade will thrive and the traders will have to suffer and the government will also lose revenue. The truth is, traders are working with low profit margin. This is why we (private sector and the government) should work together. I think the country’s economic growth will suffer if we remain focused on pointing fingers at each other.

The private sector has been expressing dissatisfaction with the federal budget 2018-19 stating that the budget has not provided any fiscal incentive. How can the central bank compensate for it through monetary policy?

Increase in tax rate has discouraged the private sector. The government should provide more funds to the central bank to expand the refinancing window. On other hand, there should be fixed interest rate in certain areas, like hydropower because their income is fixed based on the power purchase agreement rate.

Private sector leaders have been claiming that the industries and businesses are having to pay for the inefficiency of the banks?

I think there is less risk in banking business than in industries, infrastructure projects, agriculture or tourism. Banks must bring down their lavish expenses because the growth of both (banks and industries, businesses) should go hand in hand. Growth of banks is possible only when the businesses of the borrowers are performing better. If there is no business, how will the banks sustain? This is why banks must be efficient and should think about sustainability.