Interviews
‘Policy is forward-looking and we have welcomed it’
Nepal Rastra Bank (NRB) recently unveiled the monetary policy for the fiscal year 2016-17. Prithvi Man Shrestha and Bibek Subedi caught up with Upendra Poudel, CEO of NMB Bank and president of the Nepal Bankers’ Association (NBA), to discuss the policy and find out how bankers saw it. Excerpts:Nepal Rastra Bank (NRB) recently unveiled the monetary policy for the fiscal year 2016-17. Prithvi Man Shrestha and Bibek Subedi caught up with Upendra Poudel, CEO of NMB Bank and president of the Nepal Bankers’ Association (NBA), to discuss the policy and find out how bankers saw it. Excerpts:
Nepal Rastra Bank recently unveiled the monetary policy. How do you view it? Were the suggestions given by bankers incorporated in it?
This policy is forward-looking and we have welcomed it. We had given many suggestions verbally and in writing. As president of the NBA, I had a one-on-one discussion with the NRB governor too. Most of the issues have been included. Of course, a few things were left out and a few new things were added.
The banking industry’s major problem has been liquidity management. We have not been able to properly deploy our funds. This monetary policy has tried to address this issue by introducing the concept of an interest rate corridor. The monetary policy’s main job is to support the government to meet the growth and inflation targets set by the fiscal policy. So I think this policy has looked in the right direction.
Bankers have always said that the monetary policy should not come in the form of a directive. However, this policy is also like a directive as it has ordered mandatory lending to the deprived and productive sectors. What is your take on that?
Fundamentally speaking, asking commercial banks to lend in such areas can be counter-productive as they can lose focus in their area. However, when we look at the economic structure of the country, the requirement to lend in those areas is a necessity. Until our economy matures to a certain level, such interventions will continue. We know that very well because we understand the compulsion of the government and and NRB. So we will try our best to support NRB’s move.
NRB has increased compulsory lending to the productive sector like agriculture and energy to 15 percent from 12 percent. It said that banks hadn’t even been able to meet the existing target of 12 percent. Against this backdrop, how challenging will it be to fulfil the new target?
We must increase our lending to the productive sector. This is essential not only for economic growth but also for the survival of the banking industry. Without growth in the productive sector, we cannot have healthy growth in the banking sector.
Since NRB has listed only two sub-sectors under the productive sector—agriculture and energy—it has been difficult for commercial banks to lend only to these sectors. Definitely, banks would like to increase their lending to the farm sector. But there are obstacles preventing banks from going into this sector. For example, there are different types of intermediaries in the form of individuals or organisations between the farmers and the market which control the value chain of agriculture. And there are other bottlenecks too.
With regard to lending to the hydropower sector too, there are issues. Even if we sanction loans for a hydropower project, it will take a lot of time for the actual disbursement when the project reaches the electromechanical phase. The other major issue is the power purchase agreement (PPA) model adopted by the Nepal Electricity Authority (NEA). Banks will only lend to projects having a ‘take or pay’ model of the PPA with the NEA. Banks are not comfortable lending to projects having a ‘take and pay’ model. The government is ready to adopt a ‘take or pay’ model for projects with a combined capacity of 2,700 MW. After crossing this mark, it is planning to adopt the ‘take and pay’ model. So I think banks will not lend to those projects if there is no guarantee that their production will get a proper market.
What is the reason behind the banking industry’s strong reservation over the new monetary policy’s provision for banks to give 2 percent of their total loans to the deprived sector directly? Don’t you think that if banks lend directly to this sector, borrowers will be freed of the high interest rates charged by microfinance institutions and cooperatives?
The major issues in deprived sector lending are access to finance and procedural simplicity while granting loans rather than a high interest rate. It will be very difficult for small borrowers to comply with the procedural requirement demanded by commercial banks while issuing credit.
As of now, microfinance institutions are mobilizing funds of commercial banks. Since the monetary policy has made a mandatory provision for commercial banks to give 2 percent of their total lending directly to the deprived sector, they will pull that amount from microfinance institutions. This means around Rs25 billion will be withdrawn from microfinance institutions. This will create a huge funding gap and it needs to be addressed.
Moreover, commercial banks have no expertise in this sector as we don’t have the network and skill that microfinance institutions have. Administering small loans to the deprived sector requires a separate specialized institution. We do not have the capacity. Even then, we will follow NRB’s policy. I think NRB should give us some time to implement it.
Also, the monetary policy has decreased the limit on deposits that banks can collect from institutional depositors to 50 percent from 60 percent. What will be its impact on the banking industry?
This is a good move by the central bank as we must reduce our reliance on institutional depositors. NRB should also gradually decrease the concentration of a single depositor from the existing 20 percent as this is quite risky.
The last fiscal year was very turbulent for the country economically because of the devastating earthquake, blockade by India and unrest in the southern plains. Both fiscal and monetary policies have been unveiled for this fiscal year. But political uncertainty still exists. What will be the outlook for the banking industry?
I think the industry will do well. We went through a very tough time in the last fiscal year, but our balance sheet is pretty good. Also, our borrowers look very confident. Our private sector as well as the common people are very resilient. However, the implementation of our fiscal policy has been weak as we never met the expenditure target of our development budget. If this happens again, it can hamper the growth of the economy and the banking industry.