Borrowers have been hit hard due to the increasing lending rates in recent times. Citing the increased liability of deposit collection banks and financial institutions have been frequently revising the lending rate even breaching the regulatory norms on weighted interest rate spread to maximise profits. However, Nepal Rastra Bank - central regulatory and monetary authority - has been neglecting the plight of the borrowers. Pushpa Raj Acharya and Sujan Dhungana of The Himalayan Times caught up with the Executive Director of NRB Nara Bahadur Thapa and Economist Achyut Wagle to learn how businesses can be viable and sustain themselves in such an interest rate regime and what will be the implications in the doing business environment. Excerpts: 

NRB is toothless despite having a lot of regulatory responsibilities

                      - Achyut Wagle

The cost of doing business in Nepal is relatively higher. How can this be improved?

Cost of doing business is the overall outcome of the business environment. Nepal has suffered disturbing political transitions, including the insurgency resulting in huge infrastructure and resource deficit. This situation was bound to hike the cost of doing business. However, a few positive developments have taken place. We suffered from energy crisis in the past resulting in higher production cost, which has been addressed to some extent. We also now have a new labour law which has created a win-win situation for both employees and employers but the challenge is in its effective implementation. The improved law and order situation is an additional benefit. Yet, there are numerous challenges and resource constraint is the major one. Our constitution and the philosophy of political parties are confusing in terms of promoting business and political economic ideology in Nepal is not constant. The recently unveiled ‘white paper’ of the government is confusing in terms of whether the government is trying to control the economy or not. Similarly, government is spending resources to revive dysfunctional state-owned enterprises. The government should be clear whether it will spend scarce resources to revive such industries or for infrastructure development. As we have limited sources for resources (development partners and investment), these confusing signals are a big problem.

How can our production sector be made more competitive?

There are three major areas regarding competitiveness. Firstly, only that sector can be competitive which has good backward linkages — strong inputs and raw materials. Except for a few agricultural businesses, we do not have enough domestic raw materials. This has made our industries uncompetitive. The second area that can make industries competitive is the availability of cheap labour force, which is no longer the case in Nepal. Likewise, we do not have skilled labour force to make our products competitive. The other factor is the adoption of technology which is very slow in Nepal. Thus, reprioritising our industrial base and making policy reforms are necessary to increase competitiveness of manufacturing sector.

It is reported that cost of doing business has also risen due to instability in bank interest rates. How true is this?

Interest rates of banks and financial institutions are definitely high. The cost of capital for small and medium enterprises is almost 30 per cent and even for manufacturing sector it is almost 18 per cent, which is high. However, interest rate is not so big a problem. The actual availability of the capital itself is the problem. If we look at Nepal’s banking sector, the currently available loanable fund in the entire banking sector is not enough to finance even a 100-megawatt hydroelectricity project or a big hotel. As interest rate is a matter of demand and supply, it is bound to be higher with limited supply of capital in the market. We have only looked at the formal side of our economy while a huge amount of money (almost 70 per cent of the economy) remains in the informal sector. We should now bring all the informal resources into the formal account of the economy, which is not happening resulting in resource deficit. The real problem is the lack of adequate resources. Increasing the confidence of the private sector, effective implementation of federalism and bringing people’s money in the banking channel are some ways to manage resources.

So, what role can the central bank play to overcome the problems you mentioned?

To be very open, Nepal Rastra Bank (NRB) has become toothless though it has a lot of regulatory responsibilities. Though it should function properly in restoring and building confidence in financial sector, NRB has dithered much in its regulatory role resulting in collapse of different financial institutions. Moreover, it looks like central bank favours some financial institutions depending on who is leading NRB at the time. NRB should bring effective policies. Similarly, Nepal cannot remain an isolated economy. This is not the time to debate whether privatisation is right policy or not as that phase is over. The government should ensure policy predictability to attract private sector.

BFIs have been increasing interest rates on loans without notifying customers and are even promoting cartel in interest rates. How justifiable is this?

Actually, interest rate on loan or deposit is a contract between the banks and financial institutions and their customers. But the fact is customers are not adequately empowered to bargain what they are getting. When you request for loan, one clause you should be able to insert in your contract paper is the ceiling of interest rate that a bank can charge in the long or short term. We have the tendency of not caring of such things when applying for loans. It is a general trend that BFIs do increase interest rates when the market is changing. Meanwhile, NRB should stop the practice of commercial banks lending money to development banks, the development banks to micro finance institutions (MFIs) and MFIs to cooperatives. This is one of the major flaws in banking system as it ultimately leads to higher interest rates on loans for customers. Similarly, any sort of cartel in interest rates on deposits is not good.

When there is an imbalance, lending rate is equilibrating force

                       — Nara Bahadur Thapa

Banks have surpassed the regulatory limit of five per cent interest rate spread in the third quarter to maximise profits. Why is the central bank silent about this?

Interest rate spread is the intermediation cost of the banks and financial institutions (BFIs) and reflects the efficiency or inefficiency of the BFIs. In the third quarter’s balance sheet, weighted interest rate of some banks crossed the regulatory limit of five per cent. We have witnessed the financial friction due to imbalances in deposit and credit growth since last November and the weighted interest rate spread has crossed the regulatory limit as the banks failed to balance the deposit collection and credit expansion. Overall, weighted average interest rate of banks hovered around 5.5 per cent in the third quarter due to the financial turmoil or aforementioned imbalances. When there is an imbalance, lending rate is an equilibrating force to bring the demand and supply of loanable funds together. It is difficult to control the market forces through administrative measures. The central bank has not provided any relaxation to banks and it will take action as per the rules.

Industries and businesses have said they are paying the cost of the inefficiency of the banks and NRB is not doing anything in favour of borrowers despite the lending rates having skyrocketed. What do you have to say on this?

There is no direct relationship between Nepal Rastra Bank (NRB) and industrialists/traders and only the financial intermediaries can play an effective role in executing the government policies. The NRB needs to take care of those financial intermediaries through which the central bank executes its policies. Without strong financial intermediaries, NRB cannot reach the industrialists/traders and effectively implement its policies. If the banks fail due to the financial turmoil, we have to bear a huge cost for it. This is why central bank is happy with the stability of the financial sector. We can expect the situation to normalise after the government’s capital spending increases.

NRB has allowed banks to bring funds from foreign banks to address the current challenges but why are banks still relying on government spending?

Being able to bring funds from foreign banks depends on the credibility of the banks. We have been informed that some of them are approaching foreign financial institutions and a few of them have started obtaining foreign loans but it is still negligible in size till now.

You mean the government and NRB do not have any responsibility towards borrowers, and they have to pay interests that are hiked frequently citing the increased cost of deposits?

NRB has a refinancing window of Rs 25 billion and we can provide up to Rs 20 billion through this facility. Till date only Rs 15 billion has been utilised and we still have Rs five billion that can be provided as refinancing to the banks to address the demand of subsidised loans. However, those who are trying to obtain loans or have obtained loans for real estate business, or to invest in the stock market or purchase automobiles have been exaggerating and sensitising this issue. They were enjoying loans at low interest rate in previous years due to excess liquidity and they have been hit hard as the interest rates have increased to 12 to 13 per cent from seven to eight per cent. We know that there is unease among those investing in real estate, stock market and automobiles by obtaining bank loans but the central bank cannot take care of them.

Banks’ profits surged by 15 per cent in the third quarter. Don’t you think that the banks also have to work on low intermediation rate when their borrowers are suffering?

Banks and financial institutions have been working by abiding the regulatory parameters and this profit is generated on an automatic mode because their balance sheets are transparent. We never know about the profit of the other private industrialists/traders. We do not know the real business efficiency of the privately run businesses. Reportedly, they even maintain different balance sheets for different purposes. Those associated with the umbrella association of the private sector put pressure only on NRB to gain popularity but they do not put pressure on banks, where they themselves are beneficiaries (as promoters). The private sector is composed of corporate sector and households (individuals). Private banks are the corporate wing of the private sector and they are transparent but why do the individual businesses not want to convert to a public company is a serious question. Another factor for the profit growth of the banks is increased turnover of the traders (importers) as imports have been surging. On the other hand, price of the collateral (mainly land) is increasing, and there are less chances that the borrower will default on the loan.