There is money in the banks, there is no demand for loans. This paradox has now engulfed the Nepali banking sector. Banks are grappling with challenges including excess liquidity, increasing bad loans, pressure from capital funds, and a sluggish investment environment. Credit expansion is sluggish even as interest rates have fallen to historic lows. As bad loans increase, banks' risk-bearing capacity has shrunk. The National Bank is bringing out the monetary policy for the fiscal year 2083/84 within two weeks. The Nepal Bankers Association has made suggestions ranging from regulatory reforms to the establishment of asset management companies in monetary policy. Summary of the conversation between Kantipur's Yagya Banjade and the association's president Santosh Koirala on upcoming monetary policy, current situation of the banking sector, problems, challenges, policy reforms, possibilities of economic revival, etc.:

For the last three years, there has been excess liquidity in banks, interest rates are continuously decreasing, but banks have not been able to increase additional loans as expected, why has this situation come about?

The job of setting principles and formulating frameworks is for the regulator, but fine-grained business decisions should be left to the banks, as this encourages innovation and competition Currently, there is more than 1.1 trillion rupees of excess liquidity (amount available for lending) in the banking system. The interbank interest rate is 2.75 percent. The weighted average interest rate on bank loans is also decreasing. Despite this, credit expansion has not been able to take place at the expected pace. The first reason for this is the problem on the demand side. The investment morale of the private sector has not yet been fully restored. Due to political instability, policy uncertainty and lack of demand in the market, entrepreneurs and businessmen are hesitant to make new investments.

Second, there is also a supply-side problem. With pressure on capital funds and an increase in bad loans, banks have become more cautious in risk assessment. Third, there is a structural problem. Our economy is still dependent on agriculture and remittances. Long-term credit demand will not increase unless industrial production and exports increase. In the fiscal year 2082/83, the growth in credit flow to the private sector was only about 6-7 percent, which is much lower than the target. Even if there is a lot of liquidity, it is not possible to increase credit unless there is demand. This problem is not only of the banking sector, but of the entire economy.

The monetary policy for the next fiscal year is coming in about two weeks. The Bankers Association has already made 21-point suggestions. Could you briefly explain those suggestions?

The association has demanded flexibility in the base rate determination method. So that banks can determine appropriate interest rates based on market competition. It has been asked to provide time and facilitation to banks under pressure from bad loans to supplement capital. The budget has announced the establishment of an asset management company. It has been said that a concrete roadmap for this should be mentioned in the monetary policy.

It will be said that additional loan rescheduling and restructuring facilities should be provided to borrowers in the affected areas. The association has urged that the percentage limit of minimum mandatory poor class loans be reduced or that it be linked to productive sector loans. The association also demands policy facilitation and clear cyber security standards for the expansion of digital banking. The association has also suggested that more flexibility should be adopted in foreign exchange facilities to promote exports, and that the loan loss arrangement should be made on the basis of regulatory provisions in the world and especially in neighboring countries.

Bad loans of banks are increasing, independent audit of 10 large banks has shown that bad loans have reached double digits, has bad loans spread like a 'chaff fire' within the banks ?

The number of mobile banking users in Nepal has now crossed 30 million, payment methods such as Connect IPS, PhonePe, eSewa, Khalti have radically changed daily transactions The 'chaff fire' metaphor is accurate to some extent, but it is not appropriate to make it a huge issue . As of Chaitra 2082, the average bad loans (NPL) of the banking system has reached 5.6 percent . This is a significant increase compared to the same period last year . But the fact shown by the independent audit is even more serious . Many loans were kept 'alive' during the post-Covid restructuring facility . After that period, the true quality of those loans has started to come out . Real estate, loans secured by the stock market, and small and medium enterprise loans have been particularly affected .

However, this problem can be managed . Banks are actively restructuring loans, implementing additional collateral (loss provision for bad loans) and implementing them on time . The regulatory vigilance of the National Bank has also increased . Therefore, banks have accepted this problem and are determined to solve it .

Whenever bad loans increase, there is talk of establishing an asset management company (AMC) but it does not work, the same thing has happened now, but where, by whom, how to establish it has not yet been decided, tell us about the preparations for establishing an AMC ?

The concept of AMC is not new . South Korea, Malaysia and Indonesia successfully managed bad loans by establishing AMC after the Asian financial crisis of 1997/98 . The ‘National Asset Reconstruction Company Limited’ has also been established in India.

The Bankers Association in Nepal has been repeating its demand for the establishment of an AMC. The association suggests that it should be established in partnership with the government, the Nepal Rastra Bank and commercial banks. A special purpose vehicle (SPV) can be formed with 51 percent government ownership and the remaining investment from the banking sector. For this, an amendment to the ‘Banks and Financial Institutions Act (BAFIA)’ and a separate ‘AMC Act’ are also required. The Nepal Rastra Bank is studying this matter. The government has said in this budget that the AMC will be established by Poush 2083. We hope that a concrete roadmap will be provided in the upcoming monetary policy.

On the one hand, there is sufficient liquidity in the banks, on the other hand, more than half a dozen commercial banks are unable to extend additional loans due to pressure on their capital funds. Why did this situation arise?

This seemingly contradictory situation is actually caused by the problem of the capital adequacy ratio (CAR). According to the ‘Basel Three’ standards, the minimum capital adequacy ratio (Tier One) in Nepal should be 8.5 percent. But this ratio of some banks has fallen below this limit.

The reason for this is, first, as bad loans increased, additional ‘provisioning’ had to be done, which reduced profits. Second, as profits decreased, internal capital formation (return on assets) weakened. Third, as credit expanded, risk-weighted assets increased, which put additional pressure on the capital fund ratio. Therefore, some banks are unable to expand further due to pressure on capital funds.

However, to solve this problem, banks should expand capital through rights shares or preference shares. For this, the government and institutional investors should increase capital. Provisions should be reduced by managing bad loans, this can be resolved within a year or two, but for that, a solid action plan and willpower are needed.

It is said that the NRB is micro-regulating not only interest rate determination, but also small things (fees). The biggest challenge for banks now is bad loans, weak loan demand or regulatory pressure?

All three challenges are present in the banking sector at present. Bad loans are the first, weak loan demand is the second, and regulatory pressure is the third. We respect the role and objectives of the NRB. But in some areas, overly micro-regulation has reduced the commercial flexibility of banks. Frequent policy changes in service fees, interest rate determination, and loan classification have made it difficult for banks to make long-term plans. We want regulation to be based on principles by the regulator. It is the regulator's job to set principles and create frameworks, but micro-business decisions should be left to the banks, this encourages innovation and competition.

The private sector is accused of reducing investment in the productive sector due to banks being more cautious than necessary. The demand for a limit on loans to the poor in the upcoming monetary policy also confirms this. Why did this situation come about?

There is partial truth in this accusation by the private sector. Banks have become extremely cautious now. But this caution is not without reason. The experience of bad loans has made banks more vigilant in risk assessment. This is also the reason for the demand to reduce the limit on loans to the poor. Currently, commercial banks must provide a minimum of 5 percent of their total loans to the poor. While meeting this target, sometimes compliance with regulations becomes the main goal rather than a commercial perspective. Because the 5 percent limit is very old. At that time, the size of the loan was small. Now it has increased a lot. Therefore, even if the limit is reduced slightly when the size of the loan is large, more money than before goes to the poor. Banks are in favor of increasing investment in the productive sector. But for this, the government should also facilitate land acquisition, permit processes and improve the investment environment. One hand does not clap. Both banks and the government have the responsibility to create an environment.

After the latest order of the Supreme Court, there has been confusion regarding the directors and chief executive officers (CEOs) of banks and financial institutions. What impact can this have on the banking sector?

The current problem is basically a 'demand side crisis', there is money in the banks, but unless there is an environment for investment, that money is not invested in the economy. The Supreme Court's order has raised questions about some provisions of the Banks and Financial Institutions Act (BAFIA) and the circular of the Nepal Rastra Bank. This has created confusion regarding the qualifications of directors, the appointment process and tenure of CEOs. This confusion has brought short-term uncertainty to the banking sector.

Leadership instability has a negative impact on institutional decision-making processes, employee morale and investor confidence. In the long run, the judiciary, regulators and parliament should work together to create a clear legal framework. The Bankers Association is continuing its dialogue with the National Bank and the government on this issue. We urge that legal and administrative measures be adopted as soon as possible to remove this confusion, so that good governance and stability in the banking sector are maintained.

How is the business model of traditional banks changing with the expansion of digital payments, digital banking and fintech? What does the banking sector expect from the government to attract foreign investment and boost the morale of the private sector?

Digital transformation is the biggest opportunity and challenge for the banking sector at the same time. The number of mobile banking users in Nepal has now crossed 30 million. Payment channels such as Connect IPS, PhonePe, eSewa, Khalti have radically changed daily transactions. The business model of traditional banks is changing. Moving from branch-based services to digital, app-based services reduces operational costs and increases customer reach. Machhapuchhre Bank has also made significant investments in digital infrastructure. The use of artificial intelligence and big data is improving credit risk assessment.

Nepal has been on the FATF's 'Grey List' for about a year and a half. With its inclusion in the list, the first impact will be on the banking sector. Has the impact of the 'Grey List' been seen in banking transactions?

The impact of the FATF's 'Grey List' has started to be felt in the banking sector. Although the impact has not yet reached a catastrophic level. But the signs are worrying. Because its direct impact is starting to be seen in transactions with parallel banks. Some foreign banks have started demanding more in-principle agreement (due diligence) regarding correspondence with Nepali banks. Second, there has been an increase in delays and additional documentation requirements when opening international trade letters of credit (LCs). Third, remittance costs may increase and take time.

अहिलेको अवस्थामा नेपाली अर्थतन्त्रलाई चलायमान बनाउन सरकार, राष्ट्र बैंक र निजी क्षेत्रमध्ये कसले सबैभन्दा बढी नेतृत्वदायी भूमिका खेल्नुपर्छ र किन ?

यस प्रश्नको जवाफ एक शब्दमा दिन कठिन छ । यी तीन वटै निकाय एकअर्काका पूरक हुन् । तथापि अहिलेको सन्दर्भमा सरकारले सबैभन्दा बढी नेतृत्वदायी भूमिका खेल्नुपर्छ । किनभने अहिलेको समस्या मूलतः ‘माग पक्षको संकट’ हो । बैंकमा पैसा छ, तर लगानी गर्ने वातावरण नभएसम्म त्यो पैसा अर्थतन्त्रमा सञ्चालित हुँदैन । सरकारले पूर्वाधार निर्माणमा थप पुँजीगत खर्च बढाउनुपर्छ, लगानी वातावरण सुधार गर्नुपर्छ, नीतिगत स्थिरता दिनुपर्छ । राष्ट्र बैंकले मौद्रिक नीतिमार्फत तरलता, ब्याजदर र वित्तीय स्थिरता कायम राख्नुपर्छ । यो भूमिका उसले राम्रोसँग निभाइरहेको छ । निजी क्षेत्रले जोखिम लिएर उत्पादनशील लगानी गर्नुपर्छ । तर लगानीका लागि अनुकूल वातावरण चाहिन्छ । सरकार अगुवा बन्नुपर्छ, राष्ट्र बैंकले सघाउनुपर्छ र निजी क्षेत्रले लागू गर्नुपर्छ । त्रिकोणात्मक समन्वय नै अर्थतन्त्र चलायमान बनाउने कुञ्जी हो ।

समग्रमा नेपालको बैंकिङ अहिले कुन अवस्थामा छ ?

नेपाली बैंकिङ क्षेत्र समस्याग्रस्त छ । तर संकटग्रस्त छैन । हामीसँग पर्याप्त तरलता छ, नियामक ढाँचा र सक्षम जनशक्ति छ । यो क्षेत्रलाई अहिले चाहिएको राजनीतिक स्थिरता र नीतिगत निरन्तरता हो ।

बैंकिङमा कसरी आउनुभयो ? बैंकर नभएको भए तपाईं यतिबेला कुन क्षेत्रमा हुनुहुन्थ्यो ?

मेरो यात्रा सोझो बाटोमा भएको होइन । त्रिभुवन विश्वविद्यालयबाट व्यवस्थापनमा स्नातकोत्तर गरेपछि वित्त क्षेत्रको जटिलता र समाजमा यसको प्रभावले मलाई आकर्षित गर्‍यो । सुरुमा बैंक अफ काठमान्डुबाट सन् २००० मा सहायकका रूपमा आफ्नो करिएर सुरुवात गरेको थिएँ । त्यहाँबाट ग्राहकको व्यवसाय बुझ्दै, जोखिम व्यवस्थापन सिक्दै, नेतृत्व क्षमता विकास गर्दै आज यहाँसम्म आइपुगेको हुँ । यसबीचमा मैले नेदरल्यान्डको इरासमस युनिभर्सिटीबाट लिडरसिपमा डिप्लोमा प्रोग्राम पनि गरेको छु ।