'Window-dressing' in the development finance crisis

A year ago, a three-member investigation committee was formed under the leadership of former judge Gauri Bahadur Karki to solve the problems of meterbay victims. This committee has submitted the report to the government. The Department of Cooperatives has started the monitoring of large cooperatives three weeks ago with the participation of the National Bank. Just last Friday, Finance Minister Varshman Pun has formed a separate task force under the leadership of the Deputy Governor of Rashtra Bank to identify and solve the problem of microfinance.

Looking at the nature of these many working groups, the content of their reports and the government's vision (approach) to solve the problem, there is no honest attempt to find a 'solution' to the problem. The government is behaving as if the victims who have been cheated by meterbaj pay the loans they have taken and return the real estate grabbed by usurers or the deposit of the co-operative victims is the final solution to these problems. Instead of finding a real and lasting solution to the problem, it seems that the government agencies are only intent on putting a bullet in the eyes of the protestors. The root of these problems is the false development finance model adopted by Nepal and the economic or monetary policies that continuously reinforce it. It does not seem to be at the level of policy-making and regulation that their solution is not possible without radical changes in the model, policy, system and structure of institutional governance. Each of these problems has its own characteristics. There are subject-specific methodological and policy gaps.

financial access

The government's 'approach' seems to be that these problems are for one time and now they can be saved if they are put off and said 'solved'. However, the reality is not like that. Until there is an alternative political, institutional, easily accessible and sustainable system to provide loans as soon as they are needed for the people who are victims of the high interest rates of meter loans, cooperatives and microfinance, this series of exploitation will continue to continue in remote areas where the presence of the state has not reached. The root of all these three problems is Nepal's poor access to finance.

According to the 'Microeconomic Indicators of Nepal' published by the Nepal Rastra Bank last November, 51 million deposit accounts have been opened in the country. The bank's data published in 2076 claimed that 27.8 million deposit accounts were opened at that time and 18.0 million or 61 percent of the total number of adults had bank accounts even after cutting down the number of people with double accounts.

Out of a total population of 29.1 million, 40 percent of the population is under the age of 20, i.e. 16 million. Compared to this figure, it seems that every adult has a deposit account. The National Bank has also claimed that financial access based on deposit accounts has now reached 68 percent. There is no identity in these data. The World Bank's 'Global Financial Inclusion Database 2021' has given data that only 54 percent of Nepal's adult population, 50 percent of women and 45 percent of poor adults have bank accounts. Claiming financial access on the basis of opening an account, regardless of access to credit, insurance, etc., is itself meaningless.

According to the data published by the National Bank, there are a total of 1.845 thousand loan accounts in banks and financial institutions. It is very less compared to a deposit account. Otherwise, the general public's access to loans from banks and financial institutions is very low or only about 6 percent of the people. The state has never been serious about the reasons for this limitation of access. In addition, there are 3.9 million loan accounts in 57 microfinance institutions and there are 7.5 million members in about 31,000 cooperatives. These have now proven to be more of a tool for less exploitation of financial access.

First, none of these figures are reliable. From what source or method did the World Bank get this different data from the National Bank of Financial Access? Not clear. Second, Nepal's financial and monetary system has been a victim of extreme policy backwardness and deviation. For example, the structural concept of microfinance where the poorest class does not get loans without paying at least 20 percent cost of funds is suicidal from the point of view of economic development.

The preamble of the Cooperative Act, 2074 aims to 'promote cooperative values, recognition and principles of cooperative organizations'. The problem has become so complicated mainly because savings and credit cooperatives cannot operate according to this purpose. Third, the institutional mismanagement of microfinance and cooperatives has exposed the state's regulatory incompetence and inefficiency. Explaining cooperatives as the foundation of socialism and including them in the constitution as the third important pillar of the economy after public and private was, and is, completely wrong. Such a so-called economic model, which pays the most expensive interest rates to the poorest, can never be socialist. Moreover, the fact that the leaders of the political parties are the ones who make huge financial maneuvers in the name of cooperatives has introduced another form of distortion. The regulation is fragmented.

The mode of policy 'departure'

The overall development finance model and its policy, institutional and operational three aspects are so serious that the government should no longer intend to cover up the problem or escape by 'window-dressing'. It is now too late to take a policy 'departure' with good intentions and a mature approach to make the economy run in a future-oriented manner. Putting forward the facts, experience and needs, the road map of what to do and what to do next is also clear. According to this roadmap, it is necessary to introduce the finance and monetary policy and institutional restructuring. All that is needed is a 'redesign' of the economic model and the political will to implement it. Where should such willpower be shown?

One, the status given to the cooperative sector by the constitution is unnecessary. Even if it is not possible to amend the constitution immediately, the regulators should be able to run cooperatives according to the seven principles of universal recognition of cooperatives. A different classification of credit government and other productive co-operatives is inevitable. And, in accordance with the spirit of federalism, the local government should be given all the rights to regulate cooperative organizations within their area. They should also be held responsible for the risk. The assistance of the local government should also be sought in solving the problems of the cooperatives which are now in crisis.

Two, why are the local and regional governments not included in the process of solving the problems of usury nature including meterbaze? This is a serious weakness. The victims have reached the capital after crossing the borders of the municipalities and provinces. Committees and working groups have been formed at the center. But the problem is at the local level. The real identity of the creditor and the debtor is available at the local level. The local level also has the legal right to verify the reality of business claims/counter-claims and adjudicate cases. However, the local government (and even the province) has not shown any role, interest or vigilance in this overall case where the victims have repeatedly gathered in the capital to protest. Instead of seeking the support and involvement of the local elected bodies that have received public opinion for five years, the Chief District Officer, who is often transferred, has been promoted. This practice does not contribute to sustainable solutions. Not only to solve the problems of

victims that have come to the surface now, it is also necessary to make the role of institutional and policy arrangement of subsidized, small-sized loans to the "customers" who are forced to take loans from meter baggies, cooperatives and microfinance institutions a part of local finance management. It is appropriate that the central bank's role in policy regulation of money supply and exchange rate etc. should be limited to the federal level only. But future monetary policy needs to adopt the structural flexibility to cooperate with local and provincial governments as needed in financial access and on-site regulation. An environment of cooperation and partnership should be given to provincial and municipal governments to help in the 'ecosystem' of small and medium industries and to promote new 'startups'. It is also important for the central bank to understand that cooperation with provincial and local governments is important in controlling inflation caused by non-monetary causes.

Three, the political obsession with microfinance needs to be broken now. While these institutions may have had a rationale in the past for expanding financial access or financial literacy, their role as second-tier financial intermediaries is no longer essential. The concept of microfinance should be abolished by giving them a short deadline to merge with promoter 'A' class Maui banks, allow them to be upgraded to 'B' or 'C' class financial institutions according to their paid-up capital status, or close them down. If it is a national policy to promote small, medium or cottage industries, they should be provided with easy loans at lower interest rates than the general financial market. The high rate of interest charged by microfinance now only makes the poor poorer and does not help the promotion of industry at all. The experience and facts of the past five decades have proven this.

Finally, the central bank of the country needs to be freed from the mentality of hiding its policy ad hocism and its inability to expand financial services by making the definition of financial access only the number of deposit account openings. There should be no delay in showing willingness to abandon ineffective policies and adopt policies that are up-to-date instead. The exercise of central bank autonomy is not necessarily due to a clash of egos.

However, the major policy 'departure' needs to be presented through the national model of economic development and the defined blueprint for its implementation through the financial policy itself. Political ownership of policies is taken by the government and the legislature. Regulators can only help with that. Expecting better coordination between fiscal policy and monetary policy is not just a political comment. Lately, this aspect is proving to be very rare in the case of Nepal.

On average, the policy priorities of the finance minister and the government keep changing every year, the tendency of the National Bank to prefer to be status quo rather than taking big policy risks has increased. The Ministry of Finance and the National Bank of India have been blaming each other for the deterioration of the economy and policy failures. The persistent deep disagreement that is not immediately visible has become a major obstacle in the bold policy 'departure' sought by the country. Here, the government seems to be trying to do 'window-dressing' only, not to disrupt the order.