‘Banks should be self-regulated to win the trust of people’

Banks and financial institutions have been facing a perennial challenge of credit crunch following Nepal Rastra Bank’s initiative to raise the paid-up capital requirement of the BFIs. A slowdown in loan disbursement was witnessed after the second half of last fiscal and a similar problem has been affecting BFIs since the last few weeks of the ongoing fiscal. However, the central bank claims that the credit crunch is not a new problem in the banking industry of Nepal and it is not due to the increase in regulatory capital requirement. NRB has said that BFIs have not been making an effort to attract deposits and they are more urban centric for their

businesses. Chiranjibi Nepal, governor of NRB, spoke to Pushpa Raj Acharya of The Himalayan Times on the current challenges being faced by the banking fraternity and the way forward. Excerpts:

Banks and financial institutions have been facing acute shortage of loanable funds and have halted credit disbursement due to lack of deposits since the last few weeks. An exactly similar situation was witnessed in the second half of the previous fiscal. What is the central bank doing to address this challenge that has been seen particularly after regulatory capital increment?

I want to make it clear that there is no connection between the credit crunch and regulatory capital increment of the banks and financial institutions (BFIs) as the credit crunch has been witnessed since long from the end of the second quarter to the beginning of the last quarter of the previous fiscal. It is because the government’s expenditure is low and the revenue collection is high in this period as the Inland Revenue Department collects 40 per cent (of the annual estimated) income tax during the period. Earlier, banks were making heavy profits as their capital base was small but if only a single loan was defaulted then it would have a huge impact on the operation of the respective financial institution as a whole. BFIs are stronger than earlier after the paid-up capital increment and there is valid reason behind paid-up capital increment. The size of the economy was Rs 816 billion 10 years back when the central bank had raised paid-up capital requirement for BFIs. The size of the economy has increased by more than threefold in last 10 years to Rs 2,599 billion in the last fiscal and the regulatory capital increment is in line with the expansion of the economy. I am quite apprehensive about the lending policy of the bankers. They are not serious with regard to attracting deposits. They are only focused on expanding loans especially in those sectors which pay high returns despite

Nepal Rastra Bank (NRB) having defined those sectors as ‘risky’ sectors. In this fiscal, credit growth has already outpaced deposit growth as BFIs have already mobilised Rs 167 billion credit against deposit collection of Rs 106 billion. I would like to urge the banks to think in an unconventional way to attract deposits so as to be able to expand loans.

You have said there is no connection between paid-up capital increment and credit crunch and urged banks to attract more deposits. However, the potential deposit sources that could be government expenditure is very slow, remittances growth is negative, and foreign direct investment and capital transfers are also negligible. In this situation how can BFIs attract deposits and what is the unconventional way that you have hinted on?

BFIs have been largely relying on institutional deposits, government expenditure and remittances. A study carried out by NRB last year shows that import content is high, which means that if the government spends Rs 100 then around Rs 74 is used for imports. I have urged the banks to think in an unconventional manner because remittance is not a sustainable source. The practice of banking at present like financing auto or real estate will not help in the long run. The central bank has long been urging BFIs to expand loans to the productive sector, which will help boost domestic production and services and move away from short-term profit making sectors. They did not seem to agree with our ideas and that’s why we issued the mandatory provision for productive sector lending. Banks have to be far-sighted, explore new business opportunities, and help develop more entrepreneurs by providing finance to their businesses. A large number of people are still out of the reach of financial services. BFIs have to expand their networks to provide services to unbanked population, raise awareness and win the trust of people.

The ideas that you have suggested could take more time to deliver results. So, what is NRB planning to address immediate challenge as banks’ profit has fallen steeply due to a slowdown in lending?

If banks cannot attract deposits then they must halt loan disbursement. They have to follow the central bank’s rules, which allows banks to lend up to 80 per cent of the sum of the core capital and deposit collection. We do not take care about their profits. BFIs are just the trustees of the public money, and the central bank regulates them to take care of the public money.  Banks are making profits from the interest income of loans and the central bank has allowed an interest rate spread of five per cent and we have plans to gradually narrow it down. Therefore, banks have to start becoming habituated to working with low profits. If their promoters need more profits, I would like to urge them to offload their shares in the BFIs and start high-profit generating businesses.

During half-yearly review of monetary policy last fiscal, NRB introduced a provision that BFIs do not have to factor 50 per cent of productive sector lending into credit to core capital cum deposit ratio till first quarter of this fiscal. This policy was widely criticised as it seemed as though NRB was favouring those who had breached the rules. And banks have already disbursed loans to the permissible CCD expecting NRB to address the situation like in the last fiscal?

It will not repeat again. That was considered for one time for the banks and after that we started weekly monitoring of core capital cum deposit (CCD). If any BFI breaches the permissible CCD, the central bank will take action. In simple understanding, banks borrow money to lend. If they cannot borrow they have to stop lending and there is no other option. We cannot always be kind to banks as I have said that they are just trustees and they should be better regulated because the people at large have trust in the central bank. If the banks deviate from the rules they will suffer and they will lose people’s trust. This is the reason the financial institutions should be self-regulated to earn the trust of the people.

As NRB governor, you have to take care of sound credit growth for expansion of the economy as monetary policy has targeted 20 per cent credit growth to private sector to achieve desired economic growth. Hence, how can you tell the banks to stop lending as the central bank and government also have responsibilities to take action? If the BFIs are at fault they should be penalised and if it is a systemic problem then the NRB should address the problem.

BFIs also have to make an effort to collect deposits. They are not doing anything to increase deposits and depend on the government. They have been seeking refinancing facility from the central bank. We are looking into it. But suddenly on Sunday the short-term interest rate crashed. We have targeted to streamline the interbank interest rate from lower threshold of three per cent to upper threshold of seven per cent. On Sunday, interest rate went below three per cent. We use the term market interest rate crash, when the interest rate goes below the lower bound or exceeds the upper bound. We mop up liquidity from the market when interest rate is below three per cent and inject liquidity when interest rate is above five per cent. Currently, there is excess liquidity of Rs 51 billion in the banking system. Thus, we think this is only a hype, and there is no serious problem as BFIs have tried to portray. We can expect situation to gradually improve.

But the banks are apprehensive about the profit repatriation of Ncell and the deadline of mid-January to file the first instalment of the income tax?

I do not want to comment on Ncell’s profit repatriation case as the Supreme Court has already issued a verdict on it. But the central bank has asked for the schedule for profit repatriation from Ncell and it will not be repatriated at once. It will be done over a period of time so BFIs do not have to worry about it. On the other hand, the income tax filing will not have a significant impact on the banking system.