Banking crisis calls for comprehensive remedy

Kathmandu, Mar. 17

On Friday, an employee of a micro-finance company, said she is thinking to quit the job and find one in some other sector. "Anything can happen to you, anywhere, anytime. I don't carry my identity card with me anymore," she said to The Rising Nepal.

On Thursday, a group of people attacked branch manager and executive assistant of Myagdi branch of NIC Asia Bank and injured them. Earlier on Tuesday, Makwanpur Chamber of Commerce and Industry staged a sit-in protest in front of the Kumari Bank's branch office in Hetaunda, obstructed banking service and threatened the staff.

Earlier, staff of a micro-finance institution (MFI) in Jajarkot district, 640 km west of the capital city, was smeared with black shoot.

A campaign against the Banks and Financial Institutions (BFIs) was launched last month by Durga Parsain, a businessman with dubious character, which instigated many small and medium scale entrepreneurs and other individuals to express ire against the BFIs and take to the street. Meanwhile, Nepal National Federation of Entrepreneurs (NFE), a relatively new business association, announced a nation-wide protest against the BFIs.

While business activities, including manufacturing, gradually slowed down and entrepreneurs faced hard times to repay the principal and interest of their bank loan, interest rates climbed to all-time high with banks charging as high as 8 per cent premium on base rate which reached 11 per cent. "A commercial bank has recently sent a notice that interest rate on loan has been revised to 19 per cent," said an entrepreneur.

As the business community, on the eve of the election to choose new executive committee of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), is trying to vilify the banks, the BFIs have remained largely passive except the Nepal Bankers Association (NBA) and Confederation of Banks and Financial Institutions in Nepal (CBFIN) – an organisation of promoters of the banks, publishing occasional press statements.

The businesses that were hit hard by the 2015 earthquake and Indian blockade the same year had managed to overcome the crises and were ready for the growth and expansion when the coronavirus pandemic battered the business and economic growth became negative with tourism sector losing as much as 17 per cent in year.

To support the business and industry affected by the pandemic, the government and Nepal Rastra Bank (NRB) announced facilities like concessional loans, interest rate discount and refinancing. While everyone appreciated the support measures, a large chunk of the money mobilised to support business rehabilitation went off-track to real estate and stock market. Price of land and house and the stock market (NEPSE) index hit all time high.

However, the warmth could last only for a year. While the private sector lending largely went to import financing, in 2022, the national economy faced a severe liquidity crisis with the Credit-Deposit ratio hitting the 96 per cent mark. On top of it, the Russian invasion of Ukraine led to fuel and food price hike in the international markets, and created supply side constraints.

To put it in the context, the domestic economy was witnessing a boom and consumerism was in full swing but remittance, the much-needed financing for the imports of goods and services, remained stunted while tourism and other sources of foreign currency income were not functional in the wake of the COVID-19 pandemic. In an effort to respond to the situation, the government imposed a ban on the imports of the luxury items including vehicle and liquor, and the central bank implemented a provision to maintain 50 per cent to 100 per cent cash margin on imports.

The situation went out of control of the government and even the finance minister wondered where the money had gone. At the same time, the share market crashed and investors lost billions of rupees in their share valuation while the government's moratorium on plotting the land pushed real estate business into recession. Experts say that the businesspersons who diverted the loans and refinancing money to the real estate and share markets are facing hard times to manage the money to repay the loans.

"There is hopelessness all across the country," said Krishna Prasad Adhikari, Vice President of Confederation of Nepalese Industries (CNI).

From government ministers to business persons and economists, everyone believes that the situation is grave. "I have never seen so many people worrying about the deteriorating economic situation in the country," General Secretary of Nepali Congress, Gagan Thapa has said recently.

Cause of the crisis

Experts are divided on the root cause of the present crisis although they univocally maintain that it was the financial mismanagement and wrong policies thereof.

Economist Dr. Achyut Wagle said that it was the unrealistic share speculation of the MFIs that triggered the present crisis. "Microfinance is basically a social financing but this business in Nepal completely went against the philosophy. There was a fierce competition among the MFIs to earn higher profits," he said. According to him, although the central bank has capped the interest rate at 15 per cent, actual cost of fund is around 25 per cent.

Dr. Wagle suggests that the NRB should revamp the entire loan ecosystem for the deprived sector through microfinance and current practice of financing the MFIs through the commercial banks in the name of deprived sector lending also be stopped. The banks should mobilse the deprived sector lending through their networks which by now has reached all the districts and local bodies except one.

According to former Finance Minister, Surendra Pandey, the roots of present banking crisis go as far as COVID-19 period. Many businesses applied for concessional loans and refinancing even though they did not need it and used the funds to buy land and shares. A large part of loan was used in import financing. "The demand for loan soared with the beginning of the last fiscal year 2021/22 but liquidity remained the same. So, it’s natural that the interest rates went up," said Pandey, while questioning which industry would stay afloat with the loan taken at the rate of above 18 per cent.

Pandey suggested that incentives should be given to the manufacturing sector but not trading since unlike importers and traders, the real sector industries don't earn profits in a fast-track. Likewise, he said that the government should not issue bonds for a while because it might further raise the interest rates as the funds in the banking system and with the people would be mopped up by the government. Since capital expenditure of the government is very pathetic and payment system is sluggish, it would further harm the economy and country's financial system.

Sunil KC, President of Nepal Bankers Association, maintained that when there is credit boom, the money would go to the unproductive sectors as well. "When you have money, you would give away whenever there is a chance of investing it for a good return," he said.

According to him, growing risk in fund mobilisation increases premium as well. Most of the moves are just the response to the market demand. However, he maintained that the crisis has taught bankers should exhibit extra caution during the time of crisis.

VP of CNI, Krishna Prasad Adhikari, said that the present crisis is the result of the mistakes made by all the stakeholders including the government, regulator, private sector and banks. While the private sector wanted to take advantage of the situation, regulators and government were reactive to the situation.

SMEs bear the brunt

Many SMEs feel that they were never facilitated by the government and NRB. Shiva Adhikari, President of Nepal Association of Rafting Agencies (NARA), said that they were always the victims of the policy negligence. "SMEs are the backbone of any economy but in Nepal they were never facilitated. As a result, most of them are informal and rely on cooperatives and local lenders for the arrangement of business fund," he said.  

Adhikari said that commercial banks are not SME-friendly. "Take an example of tourism sector concessional loan which has not reached the needy SMEs, while the large ones took it away," he said. 

According to him, while the BFIs should ensure that the loan is used in the said sectors, lending to unproductive areas like real estate and luxury items should be controlled. He is wondering that the price of land is going up even during the present liquidity crisis but pure businesses are on the verge of collapse.

Same voice is echoed by the women entrepreneurs. The Federation of Women Entrepreneurs Associations of Nepal maintained that there is a need to formalise businesses run by women and extend concessional loan facilities to them.

Businesses versus banks

A section of business persons believe that the conflict of interest on the part of businessmen that are controlling the banks has also contributed to the crisis. Most of the large businesses have invested in BFIs, insurance companies, MFIs and even in cooperatives.

This conflict of interest has a detrimental impact on banking and business. "Organisations like FNCCI don't take up the issues of SMEs," said Shiva Adhikari, President of NARA.

CNI's VP, Krishna Prasad Adhikari, stressed on the need for the separation of businessman and bankers. He also suggested the regulator to take a business-friendly stance. "The central bank should immediately work to bring the spread rate down. It should also inject funds to the businesses facing crisis due to the untoward situation created by the supply side constraints and increased price of raw materials and transportation," said Adhikari.

Meanwhile, many businesspersons and bankers blame the upcoming election of the FNCCI for the worsening situation. "Candidates of vital posts for the FNCCI have been using the anti-banking agenda to garner votes," said a businessman on condition of anonymity. He represents many others.

However, Anjan Shrestha, Vice President of Federation of Nepalese Chamber of Industry (FNCCI), refuted such statements. It's just a coincidence that the election is happening now, he said.

According to him, interest rates should be immediately brought down so that the businesses could be able to repay their loan. "Business loans should be rescheduled and restructured for at least one year, and refinancing facility should be continued," said Shrestha.

Increasing criminal acts

According to the experts, current criminal activities against the bankers, banks and their staffs should be prosecuted as criminal offence. It is the duty of the police and security agencies to identify the criminal activities and punish them as per the law, said Economist Dr. Wagle.

Spokesperson of the NRB, Dr. Gunakar Bhatta, said that there is a group of people that is fueling the protests to push the financial system into trouble hoping to reap benefit from it. Activities like physical attack on the bankers, vandalism and barring people from obtaining services from the BFIs are criminal offences and they have detrimental impact on the confidence of bankers and staff.

"Problems in interest rates and share markets are global. If bankers are attacked just because of the high interest rates, entire ecosystem of financial intermediation could be disturbed. Entire economy might lose confidence," said Dr. Bhatta. He claimed that the foreign experts and banks have also appreciated NRB's moves and regulations in the aftermath of the COVID-19 pandemic.

Sunil KC, President of Nepal Bankers Association, said that the BFIs are the custodians of the public money and it is inappropriate to pressurise them from the street. Disturbance in financial intermediation would create risks in the economy, he said.

Reform measures

The NRB had projected that the interest rates would be adjusted by the end of the current fiscal year 2022/23. While the interest rate would be changed as per the supply and demand of money in the financial system, the central bank had asked the BFIs to reduce the spread rate to 4.2 per cent from the existing 4.4 per cent by mid-April.

Likewise, premium on loan has significantly been brought down to 5 per cent from 8 per cent some months ago.

Dr. Bhatta said that the central bank has formed a task force to implement reforms in the microfinance sector. "We are aware that the microfinance banking in Nepal has deviated from the norms of social banking. It needs correction," he said. Recently, the central bank has also asked the MFIs to refrain from customer duplication.

Similarly, another significant directive has come from the central bank to check the distribution of high amount of dividend by the FMIs. Now, they can distribute only 15 per cent of the total dividend announced. Remaining 85 per cent should be calculated as 100 per cent and half of it should be deposited to general reserve, 35 per cent to customer protection fund and 10 per cent to the Corporate Social Responsibility Fund. Remaining 5 per cent can be further distributed to the shareholders.

Published in The Rising Nepal daily on 18 March 2023.