The central bank of Nepal introduced a new monetary policy for the fiscal year 2019/20 toward the end of July, 2019. The policy highlighted major issues regarding credit crunch, and aimed for a targeted economic growth by the end of the fiscal year. Howev

Bishesh Bajracharya is a 22 year old investor/student. He is currently pursuing his undergraduate degree in Finance and Economics from the George Washington University and London School of Economics. He has been investing and researching on the Nepalese equity market from the age of 17. Having worked in different financial service sectors in Nepal, he has produced various published research papers in the field of Finance.

The monetary policy for the fiscal year 2019/20 was introduced by Nepal Rastra Bank, highlighting issues of credit crunch and economic growth.  This year’s monetary policy puts its major focus on the country’s banking sector and the crisis related to it. But the measures proposed in the newly introduced monetary policy may not be efficient or effective. Moreover, the policy hardly contains measures to effectively address the liquidity problem. To get a better insight on the policy and what changes it may bring in the economy, we interviewed analyst Bishesh Bajracharya. 

Bishesh Bajracharya is a 22 year old investor/student. He is currently pursuing his undergraduate degree in Finance and Economics from George Washington University and the London School of Economics. He has been investing and researching on the Nepalese equity market from the age of 17. Having worked in different financial service sectors in Nepal, he has published numerous research papers in the field of Finance.

During the last fiscal year, commercial banks in Nepal faced a huge crisis of credit crunch. Although the number of depositors was not decreasing, banks were running short of loanable funds while the demand for loans were rising. The central bank attempted to solve this problem and managed to take out various policies to tackle this issue. One of the major policies formulated by the central bank makes it mandatory for commercial banks to issue debentures/corporate bonds amounting to 25 percent of their paid-up capital by the end of the fiscal year. The interest spread rates for class A commercial banks has been decreased to 4.4% from 4.5%. Moreover, the central bank has also allowed commercial banks to borrow foreign currencies as well as take in foreign currency deposits.

Bajracharya believes that in order to bring about the solutions needed, the policy needs to be efficient and effective. He said that it is hard to predict whether the formulated policies will be beneficial or not, but it can be said with ease that a better approach could have been taken to solve the prevailing crisis. He believes that making all the banks issue huge debenture amounts in the public market is not going to yield any fruit. Bajracharya said, “Previously this year we have seen one or two banks issue debentures, and they were barely purchased by the general public. So, what can we expect when all the 28 banks start issuing debentures of 2 to 3 Arba each in the market? There are simply not enough buyers. This policy is similar to watering a dead plant.” He further elaborated that the illiquid nature of debentures in Nepal due to the absence of\ a strong debt market makes them an unattractive financial instrument. If the debenture issues fail to have a certain collection percentage, the banks will have go into mergers with each other in order to meet the capital requirements. Bajracharya added “If the NRB wants the banks to merge, then they could have just made a policy to do so. In the long term it is what is needed. For now, they are only beating around the bush.” He mentioned that the decrease in interest rates hint at the same thing. It would be hard for the smaller banks to operate with lower spread rates. Big banks will still be able to absorb the losses due to advantage of economies of scale on their side.

Bajracharya also believes that allowing the banks to borrow and deposit in foreign currencies is going to have little or no benefit at all to solve the credit crunch crisis at hand. He mentioned that if banks do take loans and deposits in foreign currencies, they are immediately exposed to the forex fluctuation risk, which would be a huge gamble especially because it is completely determined by external factors. Thus, he doesn’t expect banks to make use of the new option Nepal Rashtra Bank has put forth in front of them.    

Bajracharya’s view is that the Nepal Rashtra Bank should just come up with a stern policy of leading the banks to merge. He said, “If you look at any developed nations, their number of commercial banks to the economic activity ratio is not nearly as much as Nepal’s.” He added “As of now even our biggest banks in Nepal are not able to fund a significant hydropower project on their own. This shows the dire need of bigger financial institutions in our country. In terms of banking, what we need is quality over quantity, a small number of big banks as compared to a big number of small banks.”

Bajracharya also believes that the monetary policy to a certain extent does address the current economic problems, and even for the issues addressed, the policies could have definitely been better. The present monetary policy fails to have a wider view on Nepal’s economy. One of the major sectors it turned its blind eye on was the balance of trade. Bishesh believes that in order to benefit the economy in the future, the monetary policy should have a wider vision, addressing more issues that exist in the economy such as growing trade deficit, lack of a suitable environment for foreign direct investment, and dependency on the Indian economy etc. 

When asked what Bajracharya felt was the solution for the current crises he replied, “What is credit crunch? It is the lack of loanable funds. How do you increase the loanable funds without the government printing more money? Bring in foreign injections in the form of FDIs. We really need to focus on easing the process of foreign direct investments in Nepal, it is the only viable way!”
On an ending note, Bajracharya said, “Our policy makers are trying, it’s not that they aren’t. They just need to do more research and realize that you cannot afford to take a trial and error approach when you are making decisions for an entire country.” He chooses to stay optimistic about future of the Nepalese economy and added, “We just need to nudge in the right direction.”