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:

‘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.