Skyrocketing lending rates caused by the perennial challenge of credit crunch have adversely affected the economy. Nepal Rastra Bank has been criticised for being silent on the rampant hike of interest rates by banks and financial institutions. The private sector has drawn the attention of the central bank many times for assertive interventions to keep lending rates at an ideal level. NRB, through the Monetary Policy of this fiscal, tried to address the perennial challenge of credit crunch and stabilise the interest rate to boost the confidence of investors. Governor of NRB Chiranjibi Nepal spoke to Pushpa Raj Acharya of The Himalayan Times on what the central bank is doing to address the challenge. Excerpts: Lending rates have been continuously rising since the last one-and-a-half years and the private sector is apprehensive that it could have an adverse impact on their businesses. The central bank has been criticised for not taking effective measures to address this problem. Why hasn’t NRB done anything substantial? Nepal Rastra Bank is concerned about the high lending rates and the Monetary Policy 2018-19 has introduced various instruments for intervention. It has reduced the cash reserve ratio to four per cent through the Monetary Policy, so that banks and financial institutions (BFIs) can invest an ideal amount in government securities and earn interest from that. This will ultimately help BFIs to bring down the base rate. To safeguard the productive sector from the lending rate hike, we have increased refinancing facility to Rs 35 billion from this fiscal. Similarly, we have allowed commercial banks to borrow up to 25 per cent of their core capital from foreign financial institutions in convertible foreign currency and Indian currency to serve the credit demand in the country. If we delve into the reason why lending rates are rising, then it is basically due to the mismatch in deposit collection and lending. Previously, BFIs floated credit by overlooking deposit growth, but they will not be able to do so in the future as they have to submit their annual plan of deposit and credit mobilisation to the central bank and most of the banks have already done that. This time, the entire effort of NRB is to stabilise the interest rate by monitoring the banks’ deposit and credit plans to avoid financial friction and high lending rates caused by the mismatch. From when can we expect the lending rates to come down? Some banks have informed us that they have started lowering their lending rates. However, it has not been adjusted to a satisfactory level. Lending rates will come down further from the first quarter of this fiscal as the cyclical challenge of lack of loanable funds is over now through various steps taken by NRB. The central bank has already instructed banks to bring down their lending rates. We will monitor the banks based on their deposit and credit mobilisation plan and they cannot lend rampantly beyond the plan submitted to NRB. The central bank expects BFIs to bring down lending rates to an optimum level by leveraging all the aforementioned facilities extended by the Monetary Policy, including the facility for banks to issue debentures to mobilise resources. Bankers say it is difficult to lower lending rates citing that operation cost has risen due to regulatory requirement of setting up branches in each local body and other compliance costs. What do you have to say on this? BFIs should be operated efficiently. As a prudent regulator, we can understand what can be done and what is difficult for them. Their comments are one-sided opinion. NRB has also provided commercial banks the facility whereby they can calculate the deposit collected in remote rural municipalities in their cash reserve ratio and statutory liquidity ratio for next three years. On the other hand, along with expansion of branch networks, banks will also expand their businesses and collect more deposits. A prudent financial institution will take the cost involved in complying with regulatory provisions as an investment for the future. To make banks efficient, we have also narrowed down the interest rate spread or difference of lending rate and deposit collection rate to 4.5 per cent through the Monetary Policy compared to earlier provision of five per cent. By the end of the ongoing fiscal, average weighted interest rate spread of banks will have to be brought down to 4.5 per cent. BFIs are public institutions and they cannot act solely like private profit-making entities. I often tell BFIs that they are trustees of public money and people park money in banks as they have trust in the regulations of the central bank. This is why BFIs cannot interpret the regulatory provisions as compliance cost. In the previous fiscal, the interest rate spread of some banks was above five per cent. Why has NRB not taken any action against these banks? Banks that have breached the regulatory compliance will face action. The central bank has been narrowing down the interest rate spread based on the government’s Financial Sector Development Strategy and there won’t be any relaxation for BFIs on it. These provisions were introduced to make the financial services accessible, transparent and BFIs competitive at par with foreign banks. NRB has not provided any concession for banks that have gone against the rule. People had expected NRB to introduce provision of forceful merger of banks in this fiscal’s Monetary Policy. Why did it remain silent on this issue? NRB could have resorted to the option of forceful merger of big banks also if they failed to meet the paid-up capital requirement. However, all the banks met that requirement within the stipulated time. The merger and acquisition policy of the central bank has brought about transformative changes in the financial sector. It has helped to develop consolidated and stable financial sector and there is better penetration of financial services across the country. Merger and acquisition policy is in place and financial institutions willing to merge can submit an application to NRB. A few commercial banks have been manipulating stock prices in the secondary market by spreading rumours of merger, like in the recent case of Everest Bank and Laxmi Bank. Why hasn’t NRB taken action against them? The central bank has already noticed this and we have summoned the board of directors of these institutions and instructed them to stop creating such rumours to manipulate the stock prices. It is said that the central bank is mulling to bring down the number of financial institutions over a period of time. Is it true? NRB has envisioned strengthening the BFIs with strong capital base for penetration of reliable and accessible financial services. A large number of financial institutions are concentrated in urban and semi-urban areas only. But when BFIs have strong capital base, they do not hesitate to expand their services to rural and remote areas by expanding their branches. On the other hand, when the number of financial institutions is more, then it will be difficult for the central bank to effectively supervise them and some of the lapses witnessed in the past were due to lack of effective supervisory capacity of NRB. The central bank should also enhance its regulatory and supervisory capacity to prevent ill-practices under our regulatory and supervisory regime and we are doing so. Simultaneously, we have introduced the policy of merger and acquisition to consolidate financial institutions. The paid-up capital increment of BFIs was also for the consolidation of BFIs. It has also forced many development banks and finance companies to merge. In addition, it has also expedited the resolution process of problematic financial institutions as problematic financial institutions have been sold to new parties that injected regulatory capital requirement and brought a majority of financial institutions into operation. For instance, 14 out of 16 problematic financial institutions have been revived. The Monetary Policy has raised priority sector lending, but the banks did not meet this criteria in the last fiscal. Do you believe that banks will be able to meet the given target? Priority sector lending of the banks hovered at 23.45 per cent of their total loan portfolio in last fiscal as the central bank has directed them to lend 25 per cent of the total loans to productive sector. Banks themselves have been lending in a responsible manner to the productive sector, which can create multiplier benefits in the economy like job creation, address the supply-side constraints and spur economic growth. The objective of the Monetary Policy is to complement the government’s Fiscal Policy to mobilise credit to the productive sector to achieve the targeted growth rate of eight per cent in this fiscal. To channelise more resources to the productive sector, we are also looking into all possible areas where BFIs can mobilise their loans. It is reported that the overdraft facility is being mobilised in less productive sectors, like realty sector and others. The Monetary Policy has decreased the ceiling of the individual overdraft loan to Rs five million from Rs 7.5 million. We are also analysing the sectors where the business overdraft loan is mobilised. The business overdraft facility will also be minimised in sectors which are less productive for the economy. What are you plans for the rest of your tenure as central bank governor? I have worked a lot to boost the confidence of the public in banks and make the BFIs more transparent. In the remaining period of my tenure, I will put all my efforts to make the financial sector confident, strong and stable, which can serve for the betterment of the economy.