Amid internal and external pressures that have caused the country to fall into a recession, concerns over the financial situation continue to grow as the new fiscal year approaches. Sangay Sherpa from The Himalayan Times met with Gyanendra Prasad Dhungana, CEO of Nabil Bank, to gain his insights into the current banking scenario of the country, the challenges at hand, and the bank's approach towards sustainable development model. Excerpts:

What is your assessment of the current liquidity situation? Also, please share your views on the current banking scenario of the country.

At present, we have come to the end of this fiscal year with some improvement in the fiscal indicators. One of the major reasons for this is the surge in remittance inflow and the increasing number of people going abroad for foreign employment post-pandemic. If we look at the recent data, around one trillion rupees is entering the country through remittances every month. Consequently, our liquidity and foreign exchange reserve situation is also getting stronger. However, due to stagflation, demand remains affected which also decreased both import and export over the past few years. As demand remains low, it has become difficult to disperse the liquidity available in the banking sector to the market. With a decrease in demand and sales in the market, I think the economy is going through stagflation.

Moreover, we are facing a tremendous amount of challenges in terms of non-performing assets (NPAs) management. In the past six months, interest rates have gradually increased as a result of a tight liquidity situation. This led to an increase in default rates as the income of the general public remained stagnant. The NPAs in the overall banking sector are set to increase by threefold compared to the previous year, which is a major challenge. NPAs don't recover just because there is liquidity in the banks. It needs to be injected into the market leading to increased sales and economic activities, which is not happening. Another reason for that is the government's delay in making payments to construction companies despite projects being completed. Last year, the government's decision to restrict imports of certain items led to a decrease in imports which also affected local demand. The government's revenue, which is custom duty-based, decreased substantially as a result. All these factors have caused issues for banks in managing NPAs and interest recovery.

The non-performing loans of banks have increased by 3.03 per cent from 1.27 per cent in the previous year. What are the reasons for it? How could the central bank assist in minimising the risks?

During the lockdown due to COVID-19, everything came to a standstill, including production and commercial activities. Industries and businesses struggled to pay their employees, pay rent, etcetera. At the time, the central bank allowed banks to finance an additional 10 to 20 per cent of their working capital for term loans, which led to increased credit growth that year. After the lockdown, just when the economic activities were starting to increase again, the global supply chain was disrupted due to the war between Russia and Ukraine, which led to a spike in prices of raw materials fuelling inflation. The purchasing capacity of consumers decreased and affected demand in the market. Moreover, industries were forced to operate by decreasing their production capacity.

At the same time, the Nepal Rastra Bank (NRB) withdrew the facilities provided to businesses during COVID-19 stating that the economy had started to normalise. But the war in Ukraine further created challenges in the economy followed by the crisis seen in Sri Lanka, which led the government bodies to restrict imports of non-essential items. The general public understood the situation and decreased their consumption patterns, further lowering demands.

Even after the import restrictions were lifted, imports have not increased. The series of events is one of the major causes of increasing NPAs.

We have also been conducting regular monitoring to see if the loans dispersed have been utilised appropriately or if they have been over-financed. However, there is a need to further carry out monitoring activities in a stringent manner.

Last year, Nabil Bank acquired Nepal Bangladesh Bank. How has the integrated operations assisted in the bank's performance?

Nabil Bank acquired NB Bank last year. As the integrated operation process was started near the year's end, we certainly faced some difficulties in the integration of system policy procedures initially. Another major issue was the integration of culture and employees, which we were able to resolve. Since the start of joint operations between Nabil Bank and NB Bank, we have witnessed synergistic benefits and have also been able to achieve positive growth this year. The blend between NB Bank which focused on small and micro enterprises (SMEs) along with the construction sector, and Nabil Bank which focuses on the corporates has led us to achieve an additional 20 per cent of the market's growth.

However, sadly, the government at present is trying to demotivate merger and acquisition of banks by withdrawing the benefits given to banks going for merger and acquisition and imposing taxes on the process. This is expected to decrease the number of banks going for mergers and acquisitions in the future.

With the Monetary Policy coming up, what are your suggestions for creating a balanced and sustainable banking environment in the country? Also, share your outlook for the upcoming fiscal year.

We expect the Monetary Policy to be in line with the objectives set by the government. Monetary Policy is a supporting wing of Fiscal Policy. While the government has targeted economic growth of six per cent and to tame inflation at seven per cent, the Monetary Policy should use the tools necessary to achieve the targets. For that, credit growth should be expanded by 12 to 13 per cent.

The issues related to excess funding at the time of COVID-19 will be brought within the limit through the working capital guidelines in time. Going forward, the government should not restrict credit as it could slow economic activities and slow economic growth. Also, we have not been able to disperse investment in sectors as directed by the central bank as many banks are facing a shortfall in SMEs with capital less than Rs 10 million, other banks in the energy and agriculture sectors respectively. On that note, the Nepal Bankers' Association has also suggested the central bank set a target of 12 to 13 per cent of credit expansion in the upcoming Monetary Policy.

Furthermore, in order to stabilise the interest rates, the interest rate corridor system should be made effective. Also, the NRB should give continuity to the provision of facilities related to restructuring and rescheduling of loans to support the sectors which are facing negative growth following the war between Ukraine and Russia, including the construction, wholesale and retail sectors.

I'd say the NRB should bring forth a balanced Monetary Policy so that market demand and economic activities can be boosted.

Also, I think the upcoming fiscal year will be more relaxed in terms of the liquidity situation as a result of international grants and the continuous inflow of remittances. It is also less likely that the banking sector will face issues related to liquidity in the upcoming fiscal year, which in turn will lower the interest rates and increase demand. However, due to some steps taken by the government, it might be difficult to strike the balance between income and expenditure. Also, the development expenditure of the country continues to decrease as a larger portion of the revenue is set aside for current expenses. The pension and social security payment liability is also increasing for the government. As the government is facing difficulty in collecting the targeted revenue, it will decrease development expenses which will also lower domestic demand. Nevertheless, we are hopeful that the central bank is aware of this and will roll out initiatives to address the issues.

Lastly, please share some details about Nabil Bank's 'Green Week' campaign.

With an aim of supporting sustainable development through the bank and its activities, we have established sustainable banking verticals. Through this, we aim and prefer to provide additional facilities and consistent rates on loans for businesses that do not or have very less impact on environment. Initially, we launched Mahila Udhyami Karja and Mahila Krishi Karja. Next, we moved to renewable energy, which produces less carbon footprints. We have also developed a policy to refrain from providing funding for projects that contribute to increasing carbon footprints. NRB has released social and environmental guidelines which we abide by and have also developed internal policies to support sustainable development.

In the past two years, we have also made our banking activities paperless and have focused on digital banking, and established N Bank which allows customers to use 57 banking activities without having to visit the bank. To lower our own consumption, we use solar energy and have installed rainwater harvesting systems and waste management and suggest our investors do the same.

Under the concept of saving the planet for future generations, the bank celebrates 'Green Week' by conducting various activities from June 30 for one week.

We recently launched Nabil Green Housing Loan to encourage customers to invest in environment-friendly and energy-efficient housing solutions, reducing the carbon footprint of residential buildings under a few conditions. At the same time, we want to spread environmental awareness to our customers and assist in the overall sustainable development of the country through various activities.

A version of this article appears in the print on July 4, 2023, of The Himalayan Times.