NRB is a lender to banks, not their saviour
KATHMANDU, AUG 20 -
Sanjaya Panth is the International Monetary Fund (IMF)’s Senior Resident Representative to India and Nepal. Panth, a Nepali national, has been associated with the IMF for the last 17 years. Mukul Humagain and Prithvi Man Shrestha caught up with Panth who was in Nepal recently for the IMF’s Article IV discussions to talk about the findings of the mission, the IMF’s take on the Nepali economy and future assistance prospects. Excerpts:
Tell us about the recent IMF mission and its major findings.
This consultation visit, also called the Article IV visit, is a regular one. The IMF has almost 200 members, and every member country has an obligation to consult with the IMF on macroeconomic policies in an in-depth way. This mission came here to look comprehensively at Nepal’s economy, projections and prospects. We went beyond just the government and also held discussions with businessmen, bankers, labour unions and political leaders so as to make a comprehensive assessment of the overall economy and where it is heading. On the basis of this assessment, we have also made some policy recommendations.
The IMF has talked about giving more power to Nepal Rastra Bank (NRB). What is the rationale behind this?
The issue here is that when you have problems in the banking sector, you need to be able to act quickly to resolve them. We are talking about the power to intervene in problem banks in an effective way, and our recommendation is limited to that. We are not talking about other powers of NRB. We looked at legal frameworks and best practices in other countries as well. We thought it would be good if there was a legal framework in Nepal to enable NRB to act in a speedy way. In some countries, if a problem arises in banks, the whole thing gets resolved overnight.
While praising the government for its timely budget presentation, the IMF has advised controlling unnecessary subsidies.
Nepal has achieved very good revenue growth over the last few years. We are a little bit concerned this year that revenue growth may not be as high as was witnessed in previous years because the overall economy itself is not doing that well. GDP growth has slowed, so the revenue target appears to be a little ambitious. On the spending side, recurrent spending has gone up massively, and spending that has not been fully budgeted, such as for integration of Maoist ex-combatants, may also put pressure on the fiscal position. In such a situation, we are concerned that there might be pressure on domestic borrowing. It is important to note that despite all the difficulties, Nepal has had during the conflict period and the transition after that, Nepal’s macro-economy has remained stable due to two main reasons: fiscal prudence (budget discipline) and the exchange rate peg with India. The target for domestic borrowing in this year’s budget, i.e., about 2 percent of the GDP, is appropriate. We want to make sure that domestic financing remains within this periphery. To achieve this, our advice is that the government prioritize spending, making sure that the focus is on poverty reduction and infrastructure, and that spending in less productive areas is discouraged.
How does the IMF view the issues of mergers and licensing in Nepal’s financial sector? Why does the IMF think there is a need for forceful mergers?
The problems seen in the banking sector are due to a combination of three factors. First, NRB’s supervision was not as strong as it could have been. Second, when you have a very large number of banks, it naturally leads to competition and excessive risk-taking behaviour. Third, there was excessive exposure to the realty sector, where a price decline has now hurt banks’ asset quality. As far as the liquidity problem is concerned, it is only a symptom of, not the underlying reason for, the problems. In such a situation, it is appropriate to gradually reduce the number of banks over time, and merger is one of the ways. Nepal is overbanked in terms of the number of banks, not necessarily in terms of access in every part of the country. A moratorium on licensing is a very good policy in this regard and we strongly support it.
The IMF was also critical of NRB’s providing refinancing to all the BFIs equally.
The central bank is a lender to banks, not their saviour, and its lending should be given just for addressing temporary liquidity problems, not when banks have more fundamental problems. Our stance is that liquidity should be provided after a thorough diagnosis to make sure that the bank is fully solvent and that the liquidity need is only temporary. Furthermore, the liquidity should be given at a penal rate, not the normal bank rate, so that it forces banks to better manage their own liquidity in the future. And lending should be fully collatarised. The most fundamental thing is that the bank receiving liquidity support has to be solvent and well capitalised.
Don’t you think the problems seen in recent times in the banking sector have their roots in bad corporate governance and the promoters’ vested interests?
You have to make sure that fit and proper criteria are applied and there are no conflicts of interest. If you have an important owner having multiple positions in a bank, that naturally creates conflicts of interest. It is generally advisable that such issues be addressed very quickly. One of the IMF’s biggest interests is to help NRB strengthen its overall supervision and the regulatory framework. We help in different ways. For example, we have had a banking supervisor expert here at NRB recently, and we have another person coming soon for a longer period of time.
How will the resident supervisory expert help NRB?
The resident expert will help strengthen the supervisory capacity of NRB. The IMF assists NRB in multiple ways, and appointing a resident supervisory expert is just one part of our technical assistance here. For example, we have had experts look at the legal framework. We also had a mission last year that looked at the technical aspects of monetary management. Overall, in addition to the policy advice we provide through avenues such as Article IV discussions, we also have a multifaceted programme of purely technical assistance. As the need arises, we help in multiple ways.
The IMF and the government also discussed the Extended Credit Facility (ECF). When will the two sides sign an agreement on the ECF and what are the IMF’s conditions for getting the ECF?
The whole idea of the ECF is to make sure that the balance of payments (BoP) becomes strong and sustainable by the end of the programme. Therefore, for the ECF, we focus on policies affecting the macro economy and the financial sector. In every country with which we have an ECF arrangement, we negotiate a comprehensive programme that outlines actions that the government and the central bank should take and also quantitative targets that need to be met. Those policies and targets are on both fiscal and monetary policy. Given the current situation in Nepal, we also focus very much here on the financial sector. It is important for us to make sure that the legal powers for NRB that we discussed above are in place before the ECF begins. Remember that the ECF has two components: one is the policy of the government and NRB, and the second is the financing of IMF. The objective is to make sure that the two work together to achieve the agreed goals to improve the country’s future.
Source: Kantipur
Sanjaya Panth is the International Monetary Fund (IMF)’s Senior Resident Representative to India and Nepal. Panth, a Nepali national, has been associated with the IMF for the last 17 years. Mukul Humagain and Prithvi Man Shrestha caught up with Panth who was in Nepal recently for the IMF’s Article IV discussions to talk about the findings of the mission, the IMF’s take on the Nepali economy and future assistance prospects. Excerpts:
Tell us about the recent IMF mission and its major findings.
This consultation visit, also called the Article IV visit, is a regular one. The IMF has almost 200 members, and every member country has an obligation to consult with the IMF on macroeconomic policies in an in-depth way. This mission came here to look comprehensively at Nepal’s economy, projections and prospects. We went beyond just the government and also held discussions with businessmen, bankers, labour unions and political leaders so as to make a comprehensive assessment of the overall economy and where it is heading. On the basis of this assessment, we have also made some policy recommendations.
The IMF has talked about giving more power to Nepal Rastra Bank (NRB). What is the rationale behind this?
The issue here is that when you have problems in the banking sector, you need to be able to act quickly to resolve them. We are talking about the power to intervene in problem banks in an effective way, and our recommendation is limited to that. We are not talking about other powers of NRB. We looked at legal frameworks and best practices in other countries as well. We thought it would be good if there was a legal framework in Nepal to enable NRB to act in a speedy way. In some countries, if a problem arises in banks, the whole thing gets resolved overnight.
While praising the government for its timely budget presentation, the IMF has advised controlling unnecessary subsidies.
Nepal has achieved very good revenue growth over the last few years. We are a little bit concerned this year that revenue growth may not be as high as was witnessed in previous years because the overall economy itself is not doing that well. GDP growth has slowed, so the revenue target appears to be a little ambitious. On the spending side, recurrent spending has gone up massively, and spending that has not been fully budgeted, such as for integration of Maoist ex-combatants, may also put pressure on the fiscal position. In such a situation, we are concerned that there might be pressure on domestic borrowing. It is important to note that despite all the difficulties, Nepal has had during the conflict period and the transition after that, Nepal’s macro-economy has remained stable due to two main reasons: fiscal prudence (budget discipline) and the exchange rate peg with India. The target for domestic borrowing in this year’s budget, i.e., about 2 percent of the GDP, is appropriate. We want to make sure that domestic financing remains within this periphery. To achieve this, our advice is that the government prioritize spending, making sure that the focus is on poverty reduction and infrastructure, and that spending in less productive areas is discouraged.
How does the IMF view the issues of mergers and licensing in Nepal’s financial sector? Why does the IMF think there is a need for forceful mergers?
The problems seen in the banking sector are due to a combination of three factors. First, NRB’s supervision was not as strong as it could have been. Second, when you have a very large number of banks, it naturally leads to competition and excessive risk-taking behaviour. Third, there was excessive exposure to the realty sector, where a price decline has now hurt banks’ asset quality. As far as the liquidity problem is concerned, it is only a symptom of, not the underlying reason for, the problems. In such a situation, it is appropriate to gradually reduce the number of banks over time, and merger is one of the ways. Nepal is overbanked in terms of the number of banks, not necessarily in terms of access in every part of the country. A moratorium on licensing is a very good policy in this regard and we strongly support it.
The IMF was also critical of NRB’s providing refinancing to all the BFIs equally.
The central bank is a lender to banks, not their saviour, and its lending should be given just for addressing temporary liquidity problems, not when banks have more fundamental problems. Our stance is that liquidity should be provided after a thorough diagnosis to make sure that the bank is fully solvent and that the liquidity need is only temporary. Furthermore, the liquidity should be given at a penal rate, not the normal bank rate, so that it forces banks to better manage their own liquidity in the future. And lending should be fully collatarised. The most fundamental thing is that the bank receiving liquidity support has to be solvent and well capitalised.
Don’t you think the problems seen in recent times in the banking sector have their roots in bad corporate governance and the promoters’ vested interests?
You have to make sure that fit and proper criteria are applied and there are no conflicts of interest. If you have an important owner having multiple positions in a bank, that naturally creates conflicts of interest. It is generally advisable that such issues be addressed very quickly. One of the IMF’s biggest interests is to help NRB strengthen its overall supervision and the regulatory framework. We help in different ways. For example, we have had a banking supervisor expert here at NRB recently, and we have another person coming soon for a longer period of time.
How will the resident supervisory expert help NRB?
The resident expert will help strengthen the supervisory capacity of NRB. The IMF assists NRB in multiple ways, and appointing a resident supervisory expert is just one part of our technical assistance here. For example, we have had experts look at the legal framework. We also had a mission last year that looked at the technical aspects of monetary management. Overall, in addition to the policy advice we provide through avenues such as Article IV discussions, we also have a multifaceted programme of purely technical assistance. As the need arises, we help in multiple ways.
The IMF and the government also discussed the Extended Credit Facility (ECF). When will the two sides sign an agreement on the ECF and what are the IMF’s conditions for getting the ECF?
The whole idea of the ECF is to make sure that the balance of payments (BoP) becomes strong and sustainable by the end of the programme. Therefore, for the ECF, we focus on policies affecting the macro economy and the financial sector. In every country with which we have an ECF arrangement, we negotiate a comprehensive programme that outlines actions that the government and the central bank should take and also quantitative targets that need to be met. Those policies and targets are on both fiscal and monetary policy. Given the current situation in Nepal, we also focus very much here on the financial sector. It is important for us to make sure that the legal powers for NRB that we discussed above are in place before the ECF begins. Remember that the ECF has two components: one is the policy of the government and NRB, and the second is the financing of IMF. The objective is to make sure that the two work together to achieve the agreed goals to improve the country’s future.
Source: Kantipur
