Interview | Government change won’t affect monetary policy

Sunny Mahat

Sunny Mahat

Interview | Government change won’t affect monetary policy

Bhuvan Dahal, CEO of Sanima Bank and President of Nepal Banker’s Association

Nepal’s monetary policy for the fiscal year 2078/2079 (2021/2021), which the Nepal Rastra Bank (NRB) was scheduled to present on July 18, got postponed for political reasons. Already late by a week, Nepali banking fraternity awaits the policy with anticipation, especially as a new government takes over.

Sunny Mahat of ApEx talks to Bhuvan Dahal, CEO of Sanima Bank and President of Nepal Banker’s Association, about his expectations from the monetary policy and the current liquidity situation. 

What have been the biggest shortcomings of past monetary policies?

In the past, the main problem has been with meeting set targets. The targets for GDP growth and capital expenditure are rarely met. Also, inflation has never been under control. Our inflation rate is calculated based on money supply and the cost side is ignored. That’s where we fail, I think. 

But this last fiscal year saw some success. Inflation was targeted to grow at no more than seven percent and looking at the report of the past 11 months, it is only at around 3.5 percent. 

What are your expectations from the soon-to-be-announced monetary policy now that we have a new government?

I don’t think a change in government will make a fundamental difference as we are in a multi-party democracy. We have high expectations from the current governor Maha Prasad Adhikari though. He is a highly qualified, experienced banker who has already proven his mettle.

If you see reports from the last fiscal, he has met almost all targets he set in the monetary policy. Inflation is under control. Also, the minimum credit growth target of 20 percent was easily surpassed with 28 percent growth. Rastra Bank wanted to keep foreign exchange reserve of no less than seven months; we have 10 months of reserve right now. We had enough liquidity in the last fiscal, which has also brought down our lending rates. Also, interest recovery has been at around 90 percent for the banks despite the pandemic.

Going forward, we hope the liquidity situation remains the same and banks have enough funds to utilize. For this fiscal, we have suggested NRB to use the Rs 300 billion surplus as well as the remaining Rs 70 billion set apart for refinancing. We should let the sectors still under stress refinance and restructure their loans this fiscal too. Right now, commercial banks are only able to use 50 percent of the deposits made by local bodies. We request for 100 percent use to increase liquidity in the system and further decrease lending rates.

Also, we have suggested the NRB to allow inter-bank lending so that banks with both surplus or deficit liquidity can manage their finances accordingly. The NRB should also help us in promoting digital currency by giving us subsidies for inter-bank money transfers so that it becomes free of cost for end customers. If internet costs are brought down and we have enough digital literacy campaigns, we will be able to reduce the logistical costs behind paper currencies as well as create efficiency and transparency in the system. 

It is being reported in the media that ‘monsoon development’ has led to an overflow of liquidity in Nepali banks. If true, could this be counterproductive for the economy?

It is partially ‘monsoon development’ but this has more to do with the Nepali way of expenditure management. Most government as well as private organizations have this habit of making major payments at year-end. Government agencies wait for Asadh (June/July) to finish their budget. So this results in liquidity overflow in the banking system at the end of the fiscal. This year, we saw a total deposit of Rs 700 billion, out of which Rs 200 billion were made in Asadh only.

But as this is a recurring phenomenon, the banks are already prepared. We pre-plan where to spend the deposits. It is indeed counterproductive when there is a sudden cash flow or a sudden drought of money in the system. To counter this, the government has to create a system where budgets are released and bills are paid monthly or at least on short periodical basis. 

What do Nepali banks feel about the current surge in stock market investments? Have ‘share loans’ increased too? Could this create more volatility in the banks’ debt ratios?

Share loans have increased by almost 100 percent increase this year. The banks only lend 70 percent of the total value and keep the rest 30 percent as margin. Also, the liability for a debtor goes beyond the share value and the total exposure of share loans for commercial banks is only about 2.4 percent. That makes banks safe from any volatility in the share market.