Loan repayment period will be extended, Monetary Policy will meet the private sector’s expectation (WITH VIDEO)

Published On: July 2, 2020 11:30 AM NPT By: Sagar Ghimire  | @sagarghi

Nepal Rastra Bank (NRB) is working to unveil the monetary policy for the FY 2020/21 at a time when COVID-19 and the lockdown are ravaging the economy. NRB is not only under pressure to provide support to the government, businesses and banking industry to cushion the economic and financial blow, it is also entrusted to safeguard the financial stability, keep inflation in check and to ensure liquidity in the market. 

This will be the first monetary policy of the NRB after Maha Prasad Adhikari took over the leadership of the central bank as governor in April 2020. 

In an interview with Republica’s Sagar Ghimire on Monday, Governor Adhikari discussed the focus of the upcoming monetary policy, plans to provide relief and other facilities to businesses battered by the pandemic, efforts to lower interest rates and measures to safeguard financial stability during the crisis, among others. 

What is the initial assessment about the economic and financial impact of COVID-19 and containment measures imposed by the government?

The pandemic has impacted the global economy, and we are also following other’s assessments and outlook. The latest OECD’s report projects a 6 percent contraction in the global economy in 2020. Our Central Bureau of Statistics has already come up with a report that estimates the country’s economy to grow by 2.28 percent in the current fiscal year 2019/20, compared to our original target of 7 percent plus economic growth rate. The three-month lockdown has also made a huge impact on the economy. Entrepreneurs have not been able to run their businesses. When the businesses are shut, it’s obvious that it will squeeze the economy. Despite all those reports, Nepal’s position in South Asia is better. We have a positive outlook compared to negative growth in other countries. But the pandemic has put a pressure on people, society, borrowers, the banking system and the country as a whole. 

There has not yet been a rigorous study about the impact of the pandemic on our economy. Does this raise a question about the capacity of the central bank to carry out such work? Are your policy responses ad-hoc?

It’s not true that there has not been any study. A task force was formed the same day I was appointed the governor to study the effects of the coronavirus to recommend policy measures. The National Planning Commission is also carrying out a comprehensive study. Our team has also been mobilized to help the committee. Our task force has already submitted its report based on the impacts until Baisakh (mid-May). It found that tourism has been the most impacted by the pandemic, and the construction industry is in trouble. Our policy decisions and facilities to facilitate borrowers was based on that report. The task force will submit another report that will analyze the situation of Jestha (between mid-May and mid-June). The task force will continue to study and analyze the situation until the COVID-19 is behind us. 

However, our analysis and assessment are mostly for internal purposes to frame policy responses. The task force also assessed the coronavirus’ impact on the banking system. This analysis has helped us to closely monitor the impact of our policy responses to the banking sector. There are other teams at NRB that are looking into possible adjustments that we have to make in the financial sector, provisioning standards and facilities to bank customers during this time. Some policy responses that have been implemented were based on the reports that we received from these teams. 

Nepal’s private sector is eagerly waiting to hear some good news in the monetary policy. Do you think that the policy has a scope and capacity to fulfill the expectations of the private sector that could not be addressed in the budget speech?  

Private sector organizations and representations come to us and provide their suggestions about monetary policy. But monetary policy has its own limitations. We have to work within our limitations and scope. The monetary policy helps to mobilize resources available in the financial sector to meet the growth target set by the fiscal policy of the government. It serves as a supplement to fiscal policy to a certain extent. But the monetary policy itself cannot serve as a substitute or a complete supplement to the fiscal policy. This is an extraordinary time. We should not think in a conventional manner.  We cannot just say that we have been doing this, and so we will continue doing only what we have been doing. We will support and intervene to an extent allowed by our laws, regulation and international best practices to make it easier for businesses, consumers and banking sectors to stay afloat and keep humming. 

But shouldn’t the monetary policy prioritize financial stability over stimulating the economy? 

That’s the challenge faced by central banks around the globe, especially during crises. Whether it's the East Asian crisis of 1997 or the global financial crisis of 2007/08, central banks have swung into action to shield their economies from the damage. Quantitative easing became a popular terminology.   Monetary policy aims at stabilizing prices that could rise due to expansionary fiscal policy of the government. Central banks have come up with new instruments to achieve that objective. 

There is a consensus that an economy should grow to balance all other things. If there is economic instability, our efforts of controlling inflation do not work. Many central banks are introducing measures with an idea that the economy should expand, and only then other efforts work. Our government has set a target to achieve a 7 percent of growth in the upcoming FY 2020/21. Since our base is low, I don’t think that the target is high if the COVID-19 is under control. The monetary policy will aim to ensure adequate liquidity to support the government in achieving the target. There are concerns that another objective [price stability] will not be met if the policy is expansionary. But we are aware and cautious about the tradeoff.  Based on the last three months’ situation, we don’t see that possibility. We will tread carefully in the next fiscal year. Our aim is to contain the financial fallout from the pandemic, and support the economy and the government in achieving its growth target. 

NBR has provided a loan repayment holiday until mid-July as a relief to borrowers battered by COVID-19 and the ongoing lockdown. Will the timeframe be extended? 

We have provided a loan repayment moratorium until the end of Ashad (mid-July). With the end of this moratorium, it would be difficult for borrowers to repay their all deferred installments at once. So we will extend the repayment holiday after it expires in mid-July.  Those who cannot repay will get additional time. They should get it. This is the practice we have seen in other countries as well. We will extend the repayment deadline by six months, nine months or 12 months, based on the impact on income or cash flow of borrowers or for the time it takes for the revival. We do not believe that borrowers should repay the loans within the deadline even when their businesses are shuttered. We will extend the holiday. But having said that, we want borrowers, who have capacity or good earning, to service their debt on time. Those who can have to pay while we will extend the repayment holiday for the rest.     

The crisis has eroded the loan repayment capacity of many borrowers. There are concerns about deterioration of loan quality of banks, which could very well jeopardize financial stability. How real are those concerns? 

The quality of loans gets deteriorated when there is no repayment. If loan defaults rise, the non performing loan (NPL) ratio will also go up. Our priority is to make sure that performing loans do not go bad due to COVID-19. Our average NPL ratio is 1.81 percent now, and anything below 5 percent is generally considered good. We still have enough space before the NPL level goes bad. But we cannot rule out the possibility of NPL level getting worse due to the adverse impact of COVID-19 on consumers and businesses. We are closely monitoring the situation, and if the quality of loans starts to worsen, we will have to think about measures like restructuring of loans and saving businesses. But there has not been a big pressure in the NPL in the banking industry. 

Do you mean that the central bank will consider relaxation of loan classification rule as demanded by bankers? How will you strike a right balance between a need to offer relaxation during this crisis and the central bank’s mandate to maintain financial stability? 

There remains a challenge of relaxations or facilities weighing on financial stability. We won’t hesitate to provide facilities and subsidies. We would not shy away from providing adequate liquidity to banks.  But we will never compromise when it comes to the issue of financial stability or international banking norms. Even when a situation arises that leads to a compromise, it will be a transitional, not a long-term. One of our primary objectives is to maintain financial stability. We will never come up with standards that compromise our objective of financial stability. We will introduce loan loss provisioning and loan classifications by remaining under the prudential banking norms. We may tighten [bank] dividend distribution, but we will never compromise on prudential norms of [loan loss] provisioning. 

The government has announced an increase in the refinance fund in the budget. But there are complaints that the refinance fund that offers cheaper loan facilities is not easily accessible for all businesses, and only a few tend to benefit from this facility. 

Those complaints are fair to a certain extent. We have a backup fund of around Rs 38 billion for refinancing. The outstanding refinancing loan is about Rs 12 billion, except loans for those affected by the 2015 earthquakes. This means we have not been able to adequately utilize the fund. Similarly, we have not been able to take it to the targeted areas or groups. Currently, a draft on the working procedure on operating the refinance fund has been made public for consultations. One of the features of the draft is that none of the local units will be deprived from this facility. We have also reduced the limit of the loan that a business can apply so that even small borrowers can access the fund.  The outreach of the refinance facility will expand. The size of the refinance fund is also going to be increased. The budget has announced the refinance fund of Rs 100 billion. If needed, we will increase the size. We are working to take a different approach to effectively take the refinance facilities to smaller businesses. 

Banks have not yet lowered their interest rates on loans. Private sector accuses the central bank of remaining a mute spectator as banks profiteer at the expense of borrowers by charging exorbitant interest.  Has the central bank’s instruments of lowering rates become defunct? 

As of Magh end (mid-February), the weighted average interest rate was 12 percent. By Baisakh end (mid-June), this rate has come down to 10.99 percent. Reduction of one percentage point in lending rate is not small. Our desire is to have interest rates come to a range that is viable for businesses. We have undertaken some measures toward that direction. Rather than a particular digit, the volatility of interest rates is a biggest threat. Not having interest cost predictability is bad for businesses. 

We want to control that situation and make interest rates more stable. Our policies are aimed toward that direction. At the same time, our interest rates are also going down in recent weeks as the liquidity situation has eased in the market.  You will see further correction of interest rates in Jestha (mid-May to mid-June) and Asadh (mid-June to mid-July). We have instructed banks to provide a blanket waiver of 2 percentage points in their interest rates on loans in Baisakh, Jesth and Asadh (mid-march to mid-July). 

NBR could have taken other indirect measures to lower lending rates. But such a remedy would take a long time to show results. We opted for a more direct measure. We took that step because we saw the banking industry’s interest spread (difference between what banks pay to depositors and charge borrowers) higher than our cap of 4.4 percent. At a time when many businesses are fighting for survival, we thought it was an appropriate time to intervene in the market and provide relief to borrowers. NRB is not a mere spectator. We monitor the interbank rate daily. We closely watch the direction of interest rates and we intervene whenever it is needed. 

Remittance-induced liquidity of the banking sector is likely to dry up. Will this put pressure in the liquidity and interest rates in the coming days?  

We initially predicted that there might be a fall in remittances due to the ongoing pandemic. But the data shows a different story. In Chaitra (mid-April to mid-May), Nepal received remittances amounting to Rs 35 billion, which increased to Rs 54 billion in Baisakh (mid-May to mid-June). In Jestha (mid-June to mid-July), we received Rs 94 billion, more than our expectation. The data shows that remittances have not declined as per the expectation. When remittances decline, it will have a direct impact on our external sector. The central bank had already adopted several measures sensing possible decline in remittances inflow. One such measure was that we received a concessional loan from the International Monetary Fund (IMF) in foreign currency.

Do you think it is going to sustain the economy for a long time if the external sector continues to worsen?  It looks like there is a sense of complacency about the foreign exchange reserve.

We will tread cautiously. Reserve is something that will start to decline when we start to tap it. There is no point to be content with the reserve that we have now. We have to be prepared to confront any kind of scenario. We have to have a policy to reduce luxurious and unnecessary imports. We will have to continue supplementing the reserve regularly. The current level of reserve is not adequate. Higher the reserve, the more comfortable we are. We want to undertake long-term development and we have to import capital goods. We should have enough reserve for that. 

How prepared is the central bank amid worries about slowdown in the remittances, tourism earnings and foreign financing weighing on external sector stability?

We currently have a foreign exchange reserve of Rs 1,400 billion. In dollar terms, Nepal has a forex reserve of $11 billion. As imports have declined in the last three months, the country's forex reserve has improved by a significant amount. Also, the country has adopted several measures for the stability of external sectors. Till Jestha (mid-May to mid-June), the external sector is quite good. Having said that, the country needs to be cautious as exports are not picking up anytime soon, and there will be “no income” from the tourism industry. Though remittance inflow will not drop, it will not increase as per our expectations. Foreign assistance might decline as economies have been hard hit by the pandemic. We have to be cautious, but we are in a comfortable position right now.

You had pushed for banking consolidation through merger and acquisition when you were deputy governor five years ago. Will this still be a priority or be put on hold during this pandemic? 

Merger and acquisition of bank and financial institutions or financial consolidation has again become a need for the country. The number of ‘D’ class microfinance institutions has reached 90. There is no benefit of having such a large number of institutions. This breeds anomaly in the market. High number of banks is also costly. You can see up to 10 bank branches if you are wandering around a chowk where two branches would have been enough. This is only increasing cost. Merger and acquisition is even more important to reduce the financial intermediary cost. This is our regular agenda.  

This is the time to focus on implementing policies to shield the economy from the impact of COVID-19 and help in recovery, the consolidation may not become a priority.  The pandemic has already threatened the capacity to sustain and earn profit and distribute dividends like they have done in previous years. This is a high time for BFIs to embrace frugality and find cost-cutting measures. The time has now come for banks to think about their future. While thinking about the future, merger and acquisition should become an important agenda for banks and financial institutions even if we do not speak. In response to the impacts of COVID-19, merger and acquisition should be banks’ agenda. 

People are switching to digital payment systems. So has the cyber security risk. However, service providers have not invested enough to mitigate cyber security threats.

It is obvious that cyber security issues will increase as more people switch to digital platforms. To mitigate cyber security threats, investments should be made in information technology. The central bank has already issued a circular on the risk associated with information technology and digital payment. Even digital service providers are cautious about cyber security issues. You cannot completely rule out the possibility of online frauds and cyber threats. 

We need to make sure that the consumers do not have to bear the brunt of such risks. Service providers should have adequate capital or cushion to protect from unexpected shocks.  The central bank is also preparing to introduce a national payment gateway switch. The central bank is working to make a strong digital payment system in the country.

Questions have been raised about the autonomy of the Nepal Rastra Bank (NRB) in recent years. The autonomy of various central banks around the world is also under the assault. Some critics even say that NRB often remains a shadow of the Ministry of Finance. As a career central banker who now leads the NRB, do you think the institution will be able to exercise full autonomy?    

Central banks around the world are generally independent from the government to formulate and implement their monetary policies. We should not ignore the fact that the central bank is also an organ of the government. So the central bank brings out programs and policies as per the targets, programs and policies of the government or support the government in the banking system. The central bank cannot remain an island in a country or act like it came from a different planet. 

The central bank should exercise its autonomous role of formulating and implementing the monetary policy without government intervention. The Nepal Rastra Bank Act, 2002 defines the central bank as an autonomous institution. Despite various political changes, everyone has respected the autonomy of the central bank. If there is any institution that is autonomous, it’s the Nepal Rastra Bank.  We will definitely protect our autonomy. 


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