‘We have requested RBI for facility to exchange INR 500, INR 1,000 notes’

After the government of India’s decision to ban 500- and 1,000-rupee denomination Indian bank notes, Nepal also banned the sale and exchange of INR 500 and INR 1,000 notes in Nepal. The Nepal Rastra Bank has also started the process to surrender higher denomination Indian currency notes that are in Nepal. The high denomination Indian currency notes are in circulation in Nepal as the Indian government has allowed people to carry up to INR 25,000 to Nepal since the last two years to facilitate tourists and Nepali migrant workers in India on the request of Nepal government. After the Indian government’s move to ban use of INR 500 and INR 1,000 notes in India, Nepal has been seeking a way out to get exchange facility of notes of such denominations that are in Nepal. Nepal Rastra Bank Governor Chiranjibi Nepal spoke to Pushpa Raj Acharya of The Himalayan Times on the central bank’s initiative regarding the exchange facility with India and other relevant issues. Excerpts:

There is uncertainty among people holding INR 500 and INR 1,000 denomination notes after the Indian government banned them to counter the growing parallel economy. What is Nepal Rastra Bank (NRB) doing to provide exchange facility to public?

I do not think there is a substantive amount of such Indian currency notes with Nepali nationals because they came into use in Nepal just two years back. Earlier too, NRB was providing only INR 100 denomination notes to people travelling to India for different purposes.  But we can assume that traders in border areas, families of migrant workers and others frequently travelling to India might have high denomination Indian currency notes. Our foreign exchange regulations do not allow people to hold foreign currencies. In this regard, we do not have any liability and we can tell people holding such notes to themselves bear the risk. However, we have requested Reserve Bank of India (RBI) to provide a way out for Nepali citizens to exchange such notes up to a certain limit like how they have provided for Indian citizens of up to INR 4,000 and we are waiting for RBI’s response.

The Indian government allowed Nepalis and Indians travelling to each other’s countries to carry high denomination Indian notes worth up to INR 25,000. Hence, there is a substantial amount of such bank notes in Nepal. How will the notes in the formal sector be surrendered to India?

Following the Indian government’s decision to ban notes of INR 500 and INR 1,000 denominations we immediately banned the sale and exchange of such notes from Wednesday and I have talked to my counterpart Urjit Patel on how to surrender such notes that are in Nepal. In response, he assured us to convey the message to the Ministry of Finance in India because RBI itself cannot take a sole decision in this regard. We all know that this decision was made by the higher leadership of the Indian government led by Prime Minister Narendra Modi to counter the parallel economy. So, without any instruction from the government, RBI will not take any decision. RBI has asked us about the amount of money present in such denominations in Nepal. We have collected data from NRB’s reserve, banks and financial institutions and licensed money changers and currently, we have high denomination Indian notes worth INR 33.69 million.

Is NRB planning to collect data of high denomination Indian currency notes that are with the general public?

Till date, we have not collected any data from general public though we have spoken to RBI for exchange facility. We will take a move regarding this only after we get a response from RBI. Simultaneously, we have also requested the government to initiate government-to-government level talks to sort out the issue at the earliest. We have written to Ministry of Finance and Ministry of Foreign Affairs and we have been informed that both the ministries have started a dialogue with their counterpart ministries in India. I think this issue will be settled very soon. But this has given a very important message to the general public not to hold foreign currency so that they can avoid risks. As a central regulatory and monetary authority we request people to use our own currency in our country.

There has also been acute shortage of US dollars in banks. What has NRB done to address this problem?

We know that hundi, which is rampant, and the decline in flow of tourists are the major reasons for the dollar crunch. On the other hand, we have witnessed some incidents of ATM fraud. Money withdrawn from ATMs through unauthorised transactions by criminals are exchanged for dollars and other foreign currencies from money changers. We have been keeping an eye on possible activities of dollar smuggling from the country. To address the acute shortage, NRB recently brought greenback worth $10 million from Singapore. There is a provision that banks also can bring dollars and some banks have informed NRB that they have been preparing to bring dollar bills.

The country has been facing pressure regarding Balance of Payments (BoP) along with slowdown in remittances. How can the country manage this situation?

There was negative growth in the inflow of remittance in the first month of this fiscal but it improved in the second month. It is definite that we are largely dependent on remittance to make the country’s foreign exchange reserve robust. Gradually we have to diversify the source of foreign exchange. As remittance is not considered a sustainable solution, we have to focus on other sources of foreign exchange like tourism and exports, among others. On the other hand, there is a dominant number of unskilled labour migrating to the Middle East to seek job opportunities and working as cheap labour. Rather than sending unskilled labour to the job market of various countries we can make them skilled by investing in them and they can earn more money in the labour destinations than they are currently earning. I think the government should focus on skill development of human resources. That will not only increase volume of remittance but also expand entrepreneurial base in the country because people with skills can set up enterprises and create employment opportunities.

The country had taken Rapid Credit Facility from International Monetary Fund (IMF) to address BoP crisis in fiscal 2009-10 and the country also made commitment to take Extended Credit Facility (ECF). But IMF has said that Nepal is not willing to take ECF as the situation improves. What do you have to say on this?

The IMF had supported us when we faced a BoP crisis in 2009-10 and we are positive towards taking Extended Credit Facility as well and the process has already been initiated.

You have been focusing on financial sector stability and policies adopted during your leadership prove that. However, other responsibilities of the central bank like taming inflation and financial inclusion have largely been overlooked?

Financial sector was already on track and there had been a lot of efforts made before I joined NRB as governor. I am trying my best to make the country’s financial system stable and strong. Resilience of the financial institutions is high. None of the banks and financial institutions suffered despite the unfavourable economic situation in the country due to the earthquake and supply line disruptions last year. Economic activities were stalled for around a year due to these incidents. Despite that, the financial sector is doing well and I would like to appreciate their effort. There were 13 problematic financial institutions holding public deposit worth Rs 16 billion when I was appointed governor. But now almost all of them are in the process of being acquired by various business groups to revitalise them with new management. Among the problematic financial institutions, Crystal Finance is in the process of liquidation and the case of Nepal Share Market and Finance’s is in the courts. The remaining problematic institutions namely, Capital Merchant Bank and Finance, Narayani Development Bank, Kuber Merchant Bank and Finance, World Merchant Bank and Finance, Nepal Finance, Corporate Development Bank Ltd, Arun Finance, General Finance and Lalitpur Finance are in the process of being acquired by new business groups and they will be run under new management teams. Likewise, NRB has been seriously putting its effort to reduce poverty through financial inclusion and expanding outreach of financial service to the rural areas as well. And taming inflation is one of the major objectives of the central bank but we cannot deal with inflation that is caused by supply side issues. We are responsible only for demand side inflation and the central bank has been controlling demand side inflation through various instruments.

NRB has given a deadline to financial institutions to raise paid-up capital by end of this fiscal. Are there any possibilities of extending deadline if all of them can’t do so as per requirement?

We have not given any thought regarding extension of deadline. As per the capital expansion plans submitted by banks and financial institutions they will be able to expand their capital base as per the central bank’s requirement by the end of this fiscal. We are sure that the paid-up capital requirement will be met because the existing paid-up capital requirement was fixed when the size of our gross domestic product was around $6 billion and now it has expanded to $22.94 billion. This move by the central bank has strengthened credibility of banks and financial institutions. We can see the impact of capital expansion; credit issuing capacity of banks has increased significantly since the beginning of this fiscal. Credit growth shows that economic activities are reviving and it is a positive message for the country’s economy as the government has targeted to move towards a higher growth trajectory.