The Federation of Nepalese Chambers of Commerce and Industry has suggested that a second phase of financial reform is necessary along with the monetary policy for the coming fiscal year. While making suggestions to the National Bank on Friday, the federation said that a second phase of financial reform is necessary as the policy of changing interest rates alone will not yield sufficient results.

The federation said that a second generation of financial reform is necessary that includes recapitalization of the banking sector, management of non-performing assets, development of long-term capital markets, risk sharing mechanisms and development of financial instruments targeting the productive sector.

If the National Bank wants to accelerate credit expansion, it is necessary to focus on capital adequacy above interest rates, realistic flexibility in the provisioning system and capital relief measures, the federation said.

The federation suggests that a concrete decision is now needed for the management of non-performing assets of banks. Seized and non-performing assets worth billions of rupees owned by banks are lying outside the productive economy. The federation believes that if such assets can be redeployed in the economy through sale, rent, lease or asset management companies, the lending capacity of banks can increase significantly. This issue has been under discussion for many years, and now it is necessary to take it to the implementation stage, the federation has stated.

Similarly, the federation has suggested that the working capital loan system should be made flexible according to the nature of the business. The cash flow of construction, tourism, manufacturing and seasonal businesses varies. Therefore, it is not practical to apply the working capital standards in a single format in all sectors. The federation believes that flexibility should be maintained to determine the structure of the loan based on the commercial assessment between banks and entrepreneurs, which will help the productive sector operate smoothly.

The federation has stated that special financial arrangements are necessary for export-oriented industries, keeping in mind the transition from a least developed country to an upgraded country.

Nepal is being upgraded to a developing country in the near future. After that, Nepal will gradually lose many of the trade concessions it is currently receiving. In such a situation, preferential refinancing, targeted credit facilities and risk sharing programs for export-oriented micro, cottage and women-oriented enterprises are not a luxury, but a transitional necessity to maintain competitiveness, the federation's statement states.

The Federation has stated that the main challenge at present is not interest rates, but investment demand and capital mobilization. The National Bank has already reduced the policy rate, SDF and SLF rates, and the deposit interest rate has also reached a historically low level. However, despite this, credit expansion has not increased as expected, and a large amount of liquidity has been stagnant in the banking system. Therefore, the main demand of the private sector now is not to further reduce interest rates, but to strengthen the mechanism through which the impact of monetary policy reaches the real economy and restore the credit flow capacity of banks, the Federation has suggested.

It is not that banks are reluctant to lend, but the capital capacity required to expand credit is becoming limited. The core capital ratio of many banks and financial institutions has reached close to the regulatory minimum limit. In such a situation, even if there is demand for credit, there is a risk of violating the regulatory limit by providing additional credit.

These are the main suggestions given by the Federation on monetary policy:

–  The demand of the private sector is not to weaken financial discipline, but to facilitate credit flow through structural reforms.

–  The Federation's position is clear – we do not want to compromise on financial stability. Artificially lowering the deposit interest rate further risks discouraging savings and capital outflow.

–  Targeted financial instruments should be expanded to increase credit flow to the productive sector.

– The success of monetary policy should not be measured by interest rates, but by restoring confidence in the banking system, mobilizing capital in the productive sector, and revitalizing private sector investment.

–  Before classifying the loans of industries in trouble due to the economic downturn as bad loans, the restructuring and rescheduling arrangements should be made more convenient and flexible.

– The provision for taking personal guarantees from all investors and even one member of their family when a company takes a loan should be reviewed by making it flexible.

– The arrangement that only banks and financial institutions can borrow from abroad should be amended to allow private sector entrepreneurs to borrow as well.

– The existing arrangements for loan classification and loan loss arrangements should be made flexible. The provision for taking personal guarantees from all investors and all members of their families when a company needs to take a loan should be reviewed by making it flexible.

– There should be a clear policy distinction between manufacturing industries and general businesses. The risk premium should be reduced for domestic raw material-based and manufacturing industries, and the interest rate should be maintained at a difference of more than 1 percent (less).