Money
‘Money is not reaching people’s hands’
Upendra Prasad Poudel, chairman of Nabil Bank, talks about the economy and the banking sector amid Nepal’s ballooning foreign exchange reserves and slowed lending.Krishana Prasain
Amid an economic slowdown, the banking sector is looking for a slightly loose monetary policy to boost the confidence of the financial and private sectors, including individuals. The banking sector expects favourable working capital guidelines, which will open avenues for the financial industry and traders to increase their economic activities. In this context, the Post’s Krishana Prasain caught up with Upendra Prasad Poudel, chairman of Nabil Bank, to discuss the economy and the banking sector amid Nepal’s ballooning foreign exchange reserves and slowed lending. Excerpts:
The monetary policy is due soon. What are the expectations of the banking industry?
Our expectations from monetary policy are high as the country’s economy is going through a challenging situation. Some people say the economy is in crisis. But I don't call it a crisis because the external sector, including key economic indicators, is doing well. The country’s economy is looking for a boost—confidence where it will be easy for everyone to work in tandem. Our economic base is small. It will not take a long time for the economy to revive. In that background, we need a loose monetary policy to address everyone's needs.
A loose monetary policy aims to stimulate economic activity and reduce unemployment by lowering interest rates and increasing the money supply. Without a loose monetary policy, building the private sector confidence is difficult.
Liquidity is sufficient. To increase the credit demand, there is a need to boost consumption. To increase consumption, people need to have enough cash in their hands. That demands government and private sector investments.
This depends on both fiscal and monetary policies. For instance, the construction sector is facing trouble, and as a result, there is not much economic activity with the government failing to pay the contractors. When contractors are not getting money, they are not giving it to workers. So the money is not reaching the people. As a result, consumption has remained stagnant. The government is not giving subsidies to agriculture or the insurance sector. We learn that the government needs more money.
The private sector no longer trusts the government’s fiscal policy. In contrast, since the banking sector is regulated and disciplined, everyone looks up to monetary policy. Naturally, the private sector has high expectations from the central bank.
What kind of policies are needed to revive the economy?
As I said, public consumption needs to grow. To boost consumption, there is a need to increase credit. In the past, the banking sector made aggressive lending, but the credit did not go into the real economy or the productive sector. So, the central bank and commercial banks are now worried. Even though credit has seen a growth lately, the impact is not visible. At one level, the money needs to reach everyone's hands. So monetary policy needs to encourage credit flow. There is a slowdown in the banking industry, too. Banks are not able to offer dividends. Positive developments also exist. Interest has been cut, which will reduce capital costs, ultimately increasing output and consumption.
Foreign exchange reserves are at a record high. Banks’ lending has yet to improve. What does this show?
People are spending less. Reduced spending means that the demand for goods and services has declined. Even though the interest rate has declined, banks struggle to boost credit. As the foreign exchange rate increases, we have the space to increase imports. Banks have liquidity and the capacity to disburse funds. Interest rates are also declining, and the environment is becoming more conducive. But the demand for loans is a must.
The confidence in the system must be high for the demand for loans to grow. The International Monetary Fund also indicates that Nepal’s situation may improve in the next fiscal year, depending on the monetary policy.
What is sustainable banking? Why are Nepali banks reluctant to follow it?
We look at sustainable banking in a futuristic way. We work for days beyond today. We work for tomorrow's generation. We work to make resources available for tomorrow. We must work to make everything sustainable. We have to preserve nature. Banks have gone for short-term profits. That's how we have deviated from sustainability. But our banks still need to go for sustainable practices. The central bank defines the productive sector including energy as the real economy. Investing in those sectors leads to sustainability.
Our system ranks banks on the basis of profit, the number of depositors or the volume of loans. In reality, though, to be number one, the parameter should be the impact the bank has on the economy, environment, and society. Knowingly or unknowingly, everyone is talking about sustainable banking. Many banks have started reporting their carbon footprints. Many banks, including Nabil, have started various schemes for agriculture. There are products for women entrepreneurship for inclusive development and migrant workers as well. The banking sector needs to be aware of responsible investment. The central bank has been reinforcing this idea from time to time.
How have cooperatives issues affected banks?
As the financial system is interlinked, problems in the cooperative sector have impacted the banking sector directly or indirectly. Some cooperative deposits are with banks, and the bank's money has also gone to cooperatives. Not only cooperatives but some credit to loan sharks might have been sourced from banks, too. These are serious issues that need to be tackled prudently. We sense that the problem in the cooperatives sector will shake up the banking sector one day. The banking sector is highly regulated and has the capacity to absorb any shock, though it may not make a profit as before. Regulating cooperatives is difficult now: it’s already too late.
The SME sector complains that getting bank loans isn’t easy. What can be done to increase credit flow?
We are the custodians of depositors and cannot lend money to anyone easily. We draw a borderline to mitigate possible risk. Lack of financial literacy is still prevailing, and we have been working to create awareness. The financial sector has become transparent, but the private sector hasn’t. The government needs to create an environment that makes businesses transparent. The banks have started taking steps to develop and scale up entrepreneurship. Such initiative needs to be taken by the government, including the local level. The growth in entrepreneurship will stop our youths from going abroad. The government needs to spend heavily on developing entrepreneurship by supporting startups.
Nepal has started cross-border digital payment. How has the banking sector started preparation, especially on the operating side?
Banks have made a giant leap in terms of digital payment. Certain levels of credit are being approved online. Bank accounts are opened online, and security documents are automatically generated. We have moved ahead in the information and technology systems in the banking sector. However, we are still in the infancy when it comes to the adoption of artificial intelligence (AI) in the banking sector. To make transactions with India more comprehensive, we need support from Indian regulators, especially in preventing illegal transactions. With proper regulations and support, digital payments will boom.