‘I think the lending rates will come down from September’

The central bank unveiled the Monetary Policy 2018-19 last week, which has tried to address the current challenges of credit crunch and high lending rates. The Monetary Policy has minimised the cash reserve ratio and statuary liquidity ratio, allowed hedging facility against exchange rate fluctuation for Nepali banks while borrowing from foreign banks and expanded refinancing window. It has also envisioned mobilisation of optimum resources from banks and financial institutions to the productive sector to meet the credit requirement for accelerated economic growth. Pushpa Raj Acharya of The Himalayan Times caught up with Ashoke Shumsher Rana, former president of Nepal Bankers’ Association and CEO of Himalayan Bank, to discuss both the positive and negative aspects of the Monetary Policy 2018-19. Excerpts:

What is your opinion of the Monetary Policy for fiscal 2018-19 that was unveiled by the central bank recently?

I feel the Monetary Policy 2018-19 is more balanced and positive towards addressing the current challenges and paving the way for mobilising resources to achieve the growth target set by the government. It has taken a broad-based approach to address the current challenges that have surfaced in the financial sector. However, the monetary policy for next fiscal has narrowed down the interest rate spread to 4.5 per cent. It will adversely affect the profit margin of the banks as profits have already started to slow down. Nepal Rastra Bank (NRB) has a misconception that banks distribute cash dividends from the profits generated by them, but if the central bank analyses the dividend policy of the banks, most of them have issued bonus shares at a proportionate ratio to raise the paid-up capital. NRB has decided to bring down the interest rate spread without proper consultation with the banking community.

NRB argues that low interest rate spread will encourage banks to be more efficient, so why does the banking community have reservations on this?

There are two models of efficiency. In fact, it has penalised banks like Standard Chartered and compelled banks to lend in high volume to maintain profits. The central bank has brought down the interest rate spread to address the demand of business community. It is undue pressure from the business community because nobody knows the profit margin of the businesses. Why does the government not fix the profit margin for every type of business to safeguard the consumers? Banking is a transparent business and everyone can easily get information regarding how much profit the banks are making. The business community, which is creating pressure to minimise the interest rate spread, should also disclose their profit margin in a transparent way.

The Monetary Policy has provisioned forwards contract on exchange rate fluctuation when Nepali banks borrow from foreign banks. Do you think this will help banks to bring in capital from foreign financial institutions?

I think the provision of hedging facility in foreign borrowing will help to bring in funds in convertible foreign currency. However, with respect to borrowing in Indian currency from India, NRB needs to negotiate with the Reserve Bank of India (RBI) to allow Indian banks to provide physical cash as loans to Nepali banks. As far as I know, RBI has a rule that does not allow Indian banks to provide credit in Indian currency to entities from outside India. Nepali banks can avail credit facility but that must be utilised within India like for import financing, payment of trade logistics and others. Banks also have an obligation to bring funds for the purpose of credit to core capital cum deposit (CCD) ratio calculation.

The government has been asking joint venture banks in the country to borrow from partner banks. Why have joint ventures like Himalayan Bank not approached their partner banks?

It is not as easy as the government makes it out to be. We are also categorised in the same country risk provision along with other banks in the country by our partner banks. They will not provide funds to us as charity. Borrowing facility to the banks from foreign financial institutions can be a short-term remedy but for longer-term stability the Ministry of Finance, Nepal Rastra Bank and Securities Board of Nepal should focus on developing the bonds market for mobilisation of capital in priority sectors. The Asian Development Bank and the International Finance Corporation of the World Bank Group have proposed to issue local currency bonds. However, the proposal has been stalled since long and the government has not provided any explanation regarding it. Former governor of the central bank, Yubaraj Khatiwada, is at the helm of the finance ministry and we hope he will expedite it as he well understands the gravity of the issue.

Monetary Policy has encouraged banks and financial institutions to mobilise capital through issuance of bonds/debentures by providing the facility to count this capital in CCD calculation. Do you think BFIs will issue bonds/debentures in coming days?

This is definitely a good initiative. We have outstanding bond of Rs one billion and several other banks also have issued bonds/debentures. Earlier, there was no provision to count the fund collected through the issuance of bonds/debentures while calculating the CCD. The new provision will encourage BFIs to do so. On this specific question, I am speaking only through the perspective of Himalayan Bank, and we are planning to issue another bond in fiscal 2018-19.

The banking fraternity seems more proactive than the regulator in stabilising interest rates by fixing the maximum threshold of deposit rates. Why have bankers taken this measure, which has been criticised by the public sphere as cartel in interest rates?

We cannot be blamed for fixing the threshold on deposit rates and it was in no way a cartel. When the interest rate started increasing excessively due to unhealthy competition in deposit rates, we fixed the maximum threshold of deposit rates in consent with the Ministry of Finance and Nepal Rastra Bank.

Contrary to what you say, why has NRB then alleged Nepal Bankers’ Association’s decision as a move towards ‘financial repression’?

We are not aware of the formal/official comment from the central bank on this issue. It might be an informal comment from some central bank officials. I would like to refrain from making a comment on this issue.

Banks have been highly criticised by the public due to high lending rates. From when can the people expect the lending rates to come down and stabilise?

There should be a mechanism to stabilise the interest rates. The provision in the Monetary Policy 2018-19, which has reduced the CRR and SLR, will help bring down the lending rates. This will help bring down the base rate to some extent as the central bank has said that liquidity of around Rs 48 billion will be added to the BFIs. Another fault is from the banks — some have published high lending rates, which were hardly executed. For example, some banks have published lending rate which has a condition that 10 percentage points will be further added to the base rate if the loans have been defaulted, but this provision has hardly been implemented. Such practices have raised the level of weighted average lending rates. We have discussed at the NBA to publish only narrow bands instead of publishing rates that are hardly implemented. I think the lending rates will come down from September onwards and will start gradually rising again in between the third quarter and fourth quarter, when the tax collection is high. Stability in interest rates was hit due to the earthquake of April 25, 2015 and the NRB’s rule to increase paid-up capital of BFIs. To raise paid-up capital, BFIs have issued rights shares and the promoters have injected capital in the concerned BFIs by availing loans from other financial institutions. As a result, that has raised the credit demand excessively. Rights shares worth around Rs 200 billion were issued at that time, which has distorted the normal cycle of the credit demand. I think the situation will gradually normalise now.

The fiscal policy (budget) has spoken about cross-verifying financial statements of borrowers submitted to the banks and the tax office. How effective do you think will this provision be?

This is an important provision announced by the fiscal policy. We all have to work transparently. This issue has been in debate since long. It is important to understand the real business efficiency of borrowers. If the borrower presents a fabricated balance sheet to banks to avail loans, it is an issue of moral hazard. In the context of laws defining tax evasion as money laundering, financial statements must be verified with tax office. We have not found any problem with the corporate, but due to lack of proper book-keeping practices, small and medium enterprises will face challenges. In fact, the reason why I would say this provision is important is because if there is a mismatch in the financial statements submitted to the banks and the tax office, then we could face charges of aiding money laundering.