Submit your Article

Nepal is yet again facing a liquid­ity crisis. Banks have cut back on outgoing loans and are also increasing deposit rates to lure more money. As the country’s trade deficit keeps increasing, remittances keep decreasing and as the financial sys­tem is also yet to fully adapt to feder­alism, Nepali banks are struggling to increase their deposits and maintain healthy debit to credit balance. APEX’s Sunny Mahat talks to Bharat Raj Dhakal, President of the Development Bankers Association of Nepal and the CEO of Muktinath Bikash Bank Limited, about the ongoing liquidity crisis and how Nepali financial institutions are coping.

What is your take on the ongoing liquidity crisis?

There are multiple reasons for it. Decrease in remittance is one of the main reasons. Also, when the Nepal Rastra Bank ordered banks to increase their paid up capital, banks started lending aggressively for prof­its, which resulted in an imbalance between deposits and loans.

I also think the use of unregu­lated cash has become rampant after the NRB’s new regulations against money laundering limited cash transactions. People are avoiding banking channels and a lot of Nepali currency has gone unaccounted for.

Nepal’s growing trade deficit is yet another reason for the liquid­ity crunch. All our money is going abroad. Nepalis are spending more on their tours abroad than foreign tourists spend here. The billions we send aboard every year in abroad studies are also not helping.

What can the BFIs realistically do to cope with this crisis?

Banks have to start contributing more to the economy. We should work with the government to increase entrepreneurship skills and resources for the youth.

We have to expand our work beyond borrowing and lending and create a lucrative environment for entrepreneurs. We can also invest in all small, medium and large projects that support the economy. Maybe banks can reduce other expenses and invest more on financial literacy and creating conducive business environment. In the end, as the country’s economy improves, all our investments will also start giving high returns.

Can you tell us what the Muk­tinath Bikash Bank Limited is doing in particular?

Our bank’s ideology is, “the pub­lic does not need to go to banks, banks needs to go to the public”. We are going to people’s homes, teach­ing them about finance and money management and trying to persuade them to join the banking channels.

Our presence is mostly in rural areas and we focus on the deprived sector. But that is the most produc­tive sector in the country today. Our debtors invest in small-income enterprises. Our policy is to keep at least 50 percent of our investments in productive sectors.

What are your expectations from the left alliance government?

The prime minister has said the economy is his priority. With Yubaraj Khatiwada as finance min­ister, we are hopeful that his vast expertise and experience will help the government work out the causes behind repeated liquidity crises.

CPN-UML’s election manifesto promised double-digit economic growth, with primary focus on employment generation and agricul­ture. This has created many expec­tations. But we should understand that things will not change over­night. It is a gradual process and well should all play a responsible part in it.

How are development banks far­ing in this cash crunch?

The developments bank are doing well, I must say, mainly because we have spread our deposits and lending fairly among all income groups. Focusing on microfinance has made our investments safe as most of them are directed at produc­tive sectors.

This has brought about a change in perception of development banks. People assumed development banks gave high interest on deposits and charge even higher interests on loans. But our rates are now at par with commercial banks and in many cases, our loans have become faster to process and cheaper as well.

Is there a long-term fix for our economy, repeatedly hit by trade deficits and liquidity crisis?

All Nepalis should understand how the economy works. We have become too dependent on imports and we are also spending way too much on luxurious items. Also, the government needs to do a better job of spending its revenues. Instead of disbursing them periodically and in order, it is doing so haphazardly at the end of the fiscal year, which in turn obstructs the flow of money into the financial system.

There is also a problem with remittance. Our youths go abroad to work and send back their hard-earned money. But most of that income is being spent on consumer items. We need to teach them how to save. This is why I emphasize the importance of financial literacy. Also, remittance should come via proper banking channels. Illegal hundis take the money away from the financial system.

Finally, there is a need to invest on productive sectors. We have become too dependent on luxury items. A common man’s daily expenses have increased manifold compared to his incomes. He also takes out loans for unproductive use, which puts him in debt while also hampering the economy. We have to try to keep the money in the country

As the country makes the tran­sition to the federal set-up, the financial sector is also trying to come to terms with the new decen­tralized system of government. In this connection, Sunny Mahat talk­ed to Gyanendra P Dhungana, Pres­ident of the Nepal Bankers Associa­tion and CEO of Nepal Bangladesh Bank, on how the country’s com­mercial banks are preparing.

Excerpts:

How are the commercial banks in Nepal adjusting to a federal set-up?

So far there have been no spe­cific directives from the regulator in this matter. Having said that, as the banks already cater to peo­ple from all parts of the country, I think it’s more a question of adjustment than preparation. How­ever, banking sector will have to consolidate its regional capacity to expand business in the states and be ready to cater to customized requirement of each state with their differentiated needs.

Can you talk about specific challenges commercial banks are likely to face?

Nepal has always been a unitary state and federalism is a new con­cept for us. Although the need to implement federalism is fairly evi­dent, its effectiveness and practical­ity is hard to gauge.

Banks have traditionally operated in a national capital centric orien­tation, with our branches reaching some select local markets outside the valley. Now with the ensuing change in governance structure, we will have to change to regional/pro­vincial or statewide setup. This will entail a big expansion of banking manpower to begin with.

Are you taking it as an opportunity for expansion or a liability as your operation costs could increase?

It’s definitely an opportunity in the long run as the local markets might eventually emerge at state level, provided that our state-level political leadership does not waste time again in the name of transition and political development. But in the short run, our costs will surely increase as we expand operations.

Has the Nepal Rastra Bank issued any directives or formulated plans for commercial banks to adapt to federalism? And are they practical?

Like I said, until now there are no such directives from Nepal Rastra Bank. I think they will come when the regulatory authority establishes its decentralized working apparatus in the federal structure. The picture will be clear when the State Lev­el Financial Commissions and the State Level Planning Commissions are formulated and a proper vision and direction for governing financial services then emerges.

Will regional development banks benefit more in a decentralized Nepal?

The efficacy of regional devel­opment banks has already been tested. The consolidation of overall Financial Services Industry has seen many development banks merge with commercial banks or higher level financial institutions. But if there is a network of well-function­ing regional development banks in a given province, say, these regional banks will definitely have an edge as they will be local banks. This can also serve as a platform for the larger commercial banks to move in, by merging with or buying out such development banking networks, thereby increasing banking capacity as well as efficiency.