The Monetary Policy for 2019-20 fiscal which was unveiled by Nepal Rastra Bank last week has received mixed response from stakeholders. While the private sector says that the Monetary Policy has missed some key issues raised by them, the banking sector seems more cheerful. Against this backdrop, Sujan Dhungana of The Himalayan Times caught up with Nara Bahadur Thapa, former executive director of the central bank, to know about the strengths and weaknesses of the Monetary Policy. Excerpts:

What is your take on the Monetary Policy for the current fiscal year unveiled by Nepal Rastra Bank last week?

The Monetary Policy for 2019-20 is expansionary. This policy indicates that it is in support of economic growth rate. Through the Monetary Policy, the NRB has cut bank rate from 6.5 per cent to six per cent and slashed repo rate from five per cent to 2.5 per cent. Similarly, the general refinancing rate has also been lowered to three per cent from four per cent. All these policy measures indicate expansionary Monetary Policy — the Monetary Policy is in support of economic growth target of 8.5 per cent.

Do you think the Monetary Policy has been able to address the concerns of the general people?

For general public, inflation is of primary concern. If the Monetary Policy adopts effective measures to bring down inflation or prevent inflation from going up, this will cheer the general public. The second concern of the general public is access to finance — what measures have been taken through the Monetary Policy to expand people’s access to finance or the unbanked poor people. I do not think that new measures have been taken through the Monetary Policy for financial inclusion. Still, there are positive sides to the Monetary Policy. The central bank has fixed the interest rate on agriculture loans of up to Rs 1.5 million. This means those pursuing farming and agriculture-related business will get relatively cheaper loans. Another positive aspect of the Monetary Policy for general public is that it has adopted the principle of federalism regarding refinancing and productive sector lending requirements. Earlier, the refinancing facilities and productive sector lending requirements had no provincial dimension. The Monetary Policy has stated that the NRB offices outside Kathmandu Valley will collect applications for general refinancing from provinces.

This ensures that businesses in every province will be able to get concessional loans under general refinancing facility, which is provided by the central bank at three per cent and the banks cannot charge more than seven per cent. By ensuring that small businesses and farmers will be able to get loans at seven per cent under general refinancing, the Monetary Policy has linked itself with general people. Similarly, the NRB has lowered refinancing rate for SMEs to three per cent from five per cent. Thus, those taking this facility will now get loans from banks at seven per cent against 10 per cent earlier. In this sense, the central bank has linked the Monetary Policy with farmers, SMEs and entrepreneurs, which is a positive aspect.

The other aspect that a common man looks for in the Monetary Policy is the foreign exchange facility. People seek foreign exchange when travelling abroad for educational purpose or work. The latter send remittance and earn foreign exchange for the nation. When these people seek to go abroad for work or study, the nation, especially the central bank should ensure enough foreign exchange for them. But when authorities give negative message that they do not have enough foreign exchange and are curtailing passport facilities, a common man will not be happy. In the last six months, NRB has reduced the passport facility from $2,500 to $1,500.

Similarly, it also reduced such facilities for those with foreign work permits to $200 from $500. And today, common people are questioning the rationality behind such policies of the central bank. Why is NRB curtailing foreign exchanges for the very people that are contributing to the foreign reserve of the country? The Monetary Policy should have analysed these facts seriously. In this context, the NRB has created despair, not hope, among general people.

Some say that this year’s Monetary Policy has by and large only favoured the banking sector. What is your say on this?

The bankers are definitely happy with the Monetary Policy as it has introduced various measures in their favour. Bankers are happy because there are waivers on spread rate. The previous target was to reduce the spread rate to 4.5 per cent from 5.5 per cent by mid-July this year. Banks are happy because the central bank has extended the deadline to mid-July 2020. Moreover, the deadline has been pushed back to mid-July 2021 for banks that go for merger and acquisition. On the productive sector lending requirements, banks were required to lend 25 per cent to agriculture and tourism and energy sectors combined within mid-July this year. While banks have been able to lend only 17.2 per cent to these sectors so far, the central bank has extended the deadline for banks to comply with this provision till mid-July 2020, while those banks that go for merger can comply with the productive sector lending requirement by mid-July 2021. Bankers are also happy that the Monetary Policy did not introduce policies for forceful merger among banks.

The primary concern of the business community was regarding the issue of crunch of loanable funds and interest rate volatility in the banking sector. Has the central bank been able to address these concerns through the Monetary Policy?

From the private sector’s perspective, they would have been happier with the Monetary Policy if it had stuck to all aforementioned deadlines for banks. Similarly, the major concern of the private sector is related to the long-term interest rate, but most of the measures introduced through the Monetary Policy are related to reducing short-term interest rates only. Similarly, the private sector is also concerned with the spread rate, urging that it be lowered to three per cent. However, the Monetary Policy has not made any commitment to reduce the spread rate and only extended the deadline for banks to meet the spread rate requirement. The other concern of the private sector is that the Monetary Policy did not adhere to the productive sector lending requirement. Similarly, the private sector had also been demanding that the size of refinancing fund be increased to Rs 100 billion from existing Rs 50 billion, which the Monetary Policy did not address. It has to be noted though that only Rs 22 billion had been utilised of the available Rs 50 billion in refinancing fund. Also, the private sector has been saying that the Monetary Policy did not introduce measures which would have lowered their cost of doing business. Similarly, they had also expected the NRB to classify banks as per Basel III provisions so that there would be relaxation in regulation and the cost of borrowing and ease of doing business would improve, which did not happen. More importantly, as the country has been facing a crisis of loanable funds since last three years, the private sector had expected the NRB to scrap CCD ratio, which would have released nearly Rs 100 billion in the market. But instead of looking at CCD ratio as a measure to augment loanable funds, the Monetary Policy has looked at external sector. Although the Monetary Policy has expanded the scope of external borrowing, this is not under the country’s control. Only one bank, out of 28 commercial banks in operation, has borrowed above Rs three billion from external sources so far. It is through CCD ratio, which is under our own control, that we can augment loanable funds. So, the central bank should have removed or relaxed the CCD ratio and introduced the Basel III liquidity coverage ratio for systemically important banks. The Monetary Policy has failed to introduce exceptional policy measures to address problems regarding the crunch of loanable funds and interest rate issues.

NRB has also announced different subsidy packages for banks to encourage them to go for merger. Do you think big banks will actually take up these offers?

The provisions introduced in the Monetary Policy will certainly encourage merger among banks. However, not every bank will go for merger and acquisition, as they will try to maintain their identity. I believe that the banks that are having difficulty in sustaining and competing with others will choose the merger and acquisition path. As compared to the past, the number of banks and financial institutions has come down drastically and they have been making good profit. But what really counts is, has the spread rate and the lending rate of BFIs come down after the merger and has the issue regarding the crunch of loanable funds been addressed?

At some of your literary discourses, you have been raising the issue regarding the inability of NRB to function as an autonomous entity. What is holding back the central bank?

We need legislative reforms. One way of making NRB more independent is by introducing legislative and institutional reforms. The independence, transparency and accountability of NRB should go together. For this, we need to adopt various measures. The first is to introduce a monetary policy committee with legal authority. Similarly, we should change the decision making process regarding the Monetary Policy. Currently, NRB is following consensus-based decision-making process, under which some board members stay passive. The need is to shift from consensus-based decision-making process to majority or voting-based decision-making process among members of the monetary policy committee. Similarly, all the members of such committee should be made accountable for their decisions and for this, these members should issue statements with analysis and rationale behind their vote.

Lastly, all such statements of the committee members should be released for public consumption. This will ensure accountability of decisions made by the NRB committee. Likewise, members of this committee should maintain arm’s-length distance with stakeholders, including government officials, bankers and the private sector. Finally, NRB should maintain calendar for issuance of the Monetary Policy. This is how NRB should function as an autonomous entity.