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.
