NRB needs to clearly define productive sector

Kathmandu:

Less than a month back, Nepal Rastra Bank (NRB) had brought an expansionary monetary policy with an aim to contain interest rates to expand credit. The central bank has already implemented most of the major changes announced. The Himalayan Times caught up with president of Nepal Bankers’ Association (NBA) and chief executive officer of Citizens Bank International Rajan Singh Bhandari to find out how banks are adjusting to the changes brought about by the monetary policy and how effective it will be in bringing down interest rates and in expanding lending.

NRB reduced the Cash Reserve Ratio (CRR) to five per cent and Statutory Liquidity Ratio (SLR) to 12 per cent which must have released funds for banks. So how are they planning to utilise the surplus funds?

In practice, reduction of CRR and SLR does not release any investible funds as banks have to maintain 20 per cent liquidity ratio — that is 20 per cent of all the deposits cannot be lent. So the amount released can be used in investment instruments such as interbank lending and government securities, and the remaining will be parked at other financial institutions but it cannot be used to finance new loans.

At present, liquidity in the financial system seems to be in excess with deposits of Rs 1014 billion and lending of Rs 749 billion, so shouldn’t interest rate be going down?

Interest rate movement has always been responsive to liquidity. But the problem here in Nepal is that the liquidity cycle is very short — around three months. Surplus liquidity reduces deposit rate which in turn trims down a bank’s cost thus pushing the lending rate down. Lowered lending rate increases demand for loans which in turn contracts liquidity. Then banks again have to increase deposit rates. Interest had increased as of July for liquidity reasons and now they are subsiding. Moreover, interest rate depends on the term of the deposit and loan, and riskiness of projects among many other factors which also need to be considered.

To what extent does this short cyclic nature of liquidity affect a bank’s ability to plan and strategise for the future?

Banks have become quite used to tackling these liquidity and interest rate dynamics. Our country, being in a transitional phase, has a difficult time in preparing a long-term strategy on economy as demonstrated by the earlier fiscal year’s trouble with budget announcement. So we can’t expect banks to be ready with a long-term strategy.

But banks have learnt to take advantage of these situations and are making a lot of money due to interest rate difference. The monetary policy even decided to intervene and will be directing banks to maintain a spread rate of five per cent. What do you think?

I don’t think any private sector bank is enjoying a spread rate as high as seven per cent. NRB has already introduced a base rate and even allowable rate of premium for the lending rate above base rate, and then there is little point in dictating spread rate. It will only penalise efficient banks and NBA has never supported directed interest rate.

This time NRB has also directed banks to increase lending to 20 per cent of total portfolio by mid-July 2015 and 12 per cent to hydro and agro by mid-July 2014. Is it possible to do so?

Banks have always been looking for productive sector but NRB’s definition of productive sector is very narrow. Banks want to know whether lending to steel industries, sugar industries and even dairies are considered productive. NRB has positively responded to the matter and has assured that it will soon release the classification of productive sector. Likewise, current definition of deprived sector is also pretty narrow. If the central bank considers loans of less than half a million rupees floated from branches outside the valley as deprived sector lending, both targeted beneficiaries and banks can benefit.



How about the effectiveness of refinancing of loans which is being stressed to promote lending to desired sector?

Refinancing sounds good and it is beneficial for both the borrower and lending bank because of interest rate, but the only problem is the term of the refinancing which is six months at maximum.

Source: THT