The 2020/21 monetary policy unveiled by governor Maha Prasad Adhikari last week has apparently come as a relief for the business community. The Nepal Rastra Bank, which is implementing its third strategic plan (2017-2021), has supposedly generated ‘oxygen’ for the economy that was suffocating due to the Covid-19 pandemic and months-long lockdown. It seems to have been conveniently forgotten that the tools that have been used to improve the economy through financial sector management are traditional.
On the one hand, there is doubt over whether these policies would be rightly implemented. On the other hand, there is no reflection of the much-needed digital push to increase access to finance or to advance collateral-free loans to small and medium enterprises (SMEs) in service sector.
The plan to support SMEs forces financial institutions to inject funds. The need of financing in agriculture is critical but that is not the sector that can absorb all channeled funds. The traditional collateral-based lending may not be effective as the need of the hour is to invest based on project viability. But the monetary policy is mum on whether it would force commercial banks to invest in project financing. Hence the strategy of increasing direct lending may not be as effective as it has been portrayed.
The monetary policy allows financial institutions to issue ‘agricultural bond’ aimed at channeling that money to commercial agriculture. But would these institutions be able to do so while they are already struggling to sell regular bonds? Moreover, such bonds might not seem lucrative for individual buyers due to the general lack of awareness on bond investment.
The plan of mobilizing funds through tools like bonds may also not be fruitful because of existing regulatory issues in the capital market. The Securities Board of Nepal (SEBON) is still functioning in a cocoon of the Ministry of Finance (MOF) and cannot effectively monitor and regulate high-quality specific bonds such as agricultural bonds and energy bonds that the new monetary policy envision.
Since 2002, the NRB has been unveiling monetary policy in its core form. Prior to that the focus on the monetary front was on imposing policy decisions to sustain the financial sector. That limited space for the market to influence policy outcomes. But in the past 18 years, Nepal’s financial sector has grown exponentially. Again, it has been expanding with the same traditional approach of managing deposits and loans.
Our financial institutions did not try to keep pace with developments abroad, let alone be a risk-taker and invest in innovative projects in the country. The task of digitizing the sector has not even started, as we do not even have basic infrastructures such as National Payment Gateway (NPG). The government has announced the NPG would come in operation this fiscal but that looks unlikely.
Against this backdrop, the new monetary policy has been getting all the applause from lobby groups such as commercial banks and private businesses as the loan payment schedule has been extended as per their wishes. But the policy has done nothing to make the financial sector more innovative and to encourage investment in people’s ideas, not just providing loans against collateral. The NRB should learn from other countries on how they have been getting financial institutions to invest in high-potential projects and businesses, even though these businesses have no property to use as collateral.
New governor Adhikari has tried to please all, including Finance Minister Dr. Yubaraj Khatiwada. But he is missing a trick in his failure to maintain price stability and in getting the financial sector to become more inclusive and innovative.