BUILDING STABILITY IN CHALLENGING TIMES – Maha Prasad Adhikari

Maha Prasad Adhikari is the newly appointed Governor of the Nepal Rastra Bank with effect from April 6, 2020. Prior to his appointment, he served as the CEO of Investment Board Nepal for four years. He was also Deputy Governor in his three-decade long career with the Nepal Rastra Bank. Dr. Yubaraj Khatiwada nominated him as candidate for the Governor’s position and the Cabinet approved him as 17th Governor of the NRB. Adhikari completed his degree in Chartered Accountancy from India in 1993.

During his tenure as Deputy Governor, he played a critical role in bringing financial stability to banks and financial institutions on the verge of collapse due to rise in non-performing assets and exposure to risks triggered by shocks in the economy. Adhikari effectively enforced  supervisory and regulatory measures like limiting exposure to real-estate, ensuring prompt corrective actions by BFIs, curbing the practice of borrowing from foreign companies at high rates and repatriation of dividends in foreign currency to park the funds in tax haven. Adhikari architected increase in paid up capital  of BFIs up to four folds. 

Adhikari has been recognised by the financial sector as a liberal and open-minded professional. He brings the key attributes of investment facilitator and regulator to his new position, one that has the business community placing high expectations on his expertise. He takes office at very challenging and difficult times for the economy. Business 360 caught up with newly appointed Governor for his views on the current economic downturn that the world is facing and what it could mean for Nepal. Excerpts:

Nepal is witnessing a severe setback in the economy due to the COVID-19 crisis. You are taking office as the Governor of the Central Bank amidst this crisis. How do you view the near and medium term impact on the Nepali economy?

Coronavirus pandemic has been costing lives and posing manifold challenges in the economy across the globe. All the countries including Nepal have been giving priority to save lives and ensure the survival of the poor and vulnerable, and most of the countries have resorted to the lockdown to stem the spread of the virus. Enforcement of lockdown has caused severe setback to our economy and the financial system. The impact could be severe if the global progression of the Coronavirus continues. The financial sector is under immense pressure for recovery as businesses have been hit hard. The Central Bank has deferred the loan and interest payment of the third quarter to the end of this fiscal or till mid-July. There are manifold impacts to the economy; the magnitude of the loss depends on how long the countries have to take the measure of close down.

Coronavirus pandemic has been costing lives and posing manifold challenges in the economy across the globe. All the countries including Nepal have been giving priority to saving lives and ensuring the survival of the poor and vulnerable, and most countries have resorted to the lockdown to stem the spread of the virus.

International Organisations have been forecasting that the second quarter (April-June) of 2020 will be worst for the global economy as countries have to enforce lock down measures. These assumptions hint at difficult times ahead as impacts will be seen on inflation, external sector stability, government revenue and increase in expenditure requirements. We have to work cautiously to shorten the time of recovery of our economy.

There is a long list of problems that require monetary measure interventions. When will the Central Bank announce them?

Nepal Rastra Bank has been working on every possible option through forming of a task force. The panel is closely monitoring the situation to create an effective monetary stimulus for the revival of Coronavirus hit sectors. Initially, we have deferred loan and interest repayment deadline of third quarter (mid-April) to mid-July considering the cash flow problems of borrowers. Along with deferral of loan repayment deadline, cash reserve ratio (CRR) is lowered by one percentage point to 3% to ensure required liquidity in the financial system. The Central Bank has also lowered bank rates to influence and stabilise the interest of long-term loans and deposits. Nepal Rastra Bank will come up with other monetary measures and instruments based on the recommendation of its task force in the next round.

You have hinted at additional flexibility for borrowers severely hit by the crisis…

We will conduct the third quarter review of the monetary policy in the near future. Initial measures taken so far have addressed the problem that borrowers and the financial system will have to face at the end of the third quarter. The third quarter review of the monetary policy will take necessary steps to address the fiscal year end woes of borrowers and BFIs. We are closely monitoring the situation and we are committed to bringing ultimate recovery package after measuring the magnitude of loss. We are flexible and open minded to boost hard-hit sectors. But, we are concerned with the impact of flexible regulatory measures on the financial system.

Flexibility in loan repayment and the financial stability are mutually exclusive. How do you find a midway?

We do not have any confusion on this. However, addressing the costumer’s sentiment is a crucial aspect of financial stability. Deferral of loan repayment is provided to gain trust and confidence of public in the system. Borrowers have definitely felt relief from this decision during this difficult time. BFIs have reported to the Central Bank that around 60% of interest repayment is pending due to this facility extended by the Central Bank. In the next round, we will not provide this facility in blanket way; it will be more targeted for those who are severely affected only.

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The World Bank and the International Monetary Fund (IMF) have urged governments to cautiously handle the stress on the financial system. Is our financial system resilient enough to overcome the stress caused by the pandemic?

We have started witnessing stress in many layers. Some of the sectors will reach the stage of default. It will take years for the revival of the tourism sector. Non-performing assets (NPA) of BFIs will rise until the tourism sector bounces back. Despite control of the Coronavirus spread, I think countries will continue precautionary measures on cross border movement. This could further dampen the tourism sector. It could take no less than one and a half years for the revival of the tourism sector even if everything comes into its right place shortly. Transport and aviation sectors could face challenges till the people are confident to travel. An increase in lending by BFIs to tourism was witnessed due to the Visit Nepal Year 2020 with nearly 3.5% of the total portfolio financed to tourism sector. Rise in NPA will impact the profitability of the BFIs and decline in remittances will hit  multiple sectors ultimately affecting the financial system.

Who will bear the cost of repayment of deferral and discount to borrowers who repay on time? Do the government support the BFIs?

BFIs themselves have to bear the cost from their profit. We don’t think this will accrue huge cost and BFIs will manage it. All stakeholders have to compromise for the sake of the survival of the economy. BFIs have agreed to cover the cost incurred by the recent policy measures of the Central Bank.  

BFIs have lowered deposit rates by one percentage point. However, they have retained the lending rate. Is it justified to borrowers or it is because they have been granted flexibility in loan repayment?

This issue is triggered at this time by the public but the lending rates are being revised assessing the base rate at the quarter end. Neither has the Central Bank allowed the BFIs to keep lending rate at standstill for their contribution to execute the discount and deferrals in loan repayment nor are the BFIs doing this for the first time. However, the Central Bank is concerned about the revision of deposit and lending rates. We might have to introduce regulatory measures to address this issue.

The Central Bank has lowered CRR to 3%, however it has not changed the credit to core capital cum deposit (CCD) ratio. In this context, BFIs cannot lend from the liquidity it generates. Is there any possibility of suspending CCD for some time to make credit cheaper?

CCD ratio is a crucial regulatory measure. Lowering of CRR has generated ample liquidity in the market and BFIs in fact are flushed with  liquid assets along with drop in loan demand. Disbursement of loan might have been deferred in many sectors. Currently, industry average CCD ratio is around 76% against the regulatory requirement of below 80%. Once the economy goes into recovery phase and when there is possibility of credit expansion and CCD becomes the only limiting factor, we might have to resort to unprecedented measures. However, we will try our best to keep stability of the financial sector avoiding regulatory forbearance.

Some experts say that the Central Bank has the option to issue repo against the collateral of government securities as underlying asset for the medium term like the Reserve Bank of India has introduced recently. What are your thoughts?

It is too early to talk about this measure even though we have to keep in mind that we might have to introduce unprecedented instruments depending on the situation.

The Central Bank has expanded  available funding from the refinancing window to Rs 60 billion. But this facility is very less utilised  due to strict procedures to avail funds from this facility. Is NRB considering simplifying the procedure?

Utilisation of the refinancing facility is poor. Around Rs 38-40 billion of the net available financing has been utilised from the earlier Rs 50 billion refinancing facility. We have to enhance the utilisation of this fund and ensure that targeted groups are utilising this facility. Refinancing facility must be utilised by those sectors where cost of production is high and the government has responsibility to stabilise the price. Priority areas of the government include export enhancement, import substitution and deprived entrepreneurial groups. In spite of relatively low interest rate, utilisation of refinancing window is poor. We will enhance the scope of the refinancing credit and ensure proper utilisation.

Given the current scenario, will NRB raise productive sector lending from existing 25% or increase the deprived sector lending to ensure sufficient financing in agriculture and livestock?

We will not increase the slab or force BFIs to fulfill that threshold, though we will encourage them in the productive sector and to the priority of the state. We will make sure that every potential entrepreneur of the defined productive sectors like agriculture, livestock and others should have easy access to credit.

Remittances could decline to almost one-fourth in this fiscal, how will we minimise the implications?

Employment is affected globally due to the recent pandemic. Job losses of migrant workers will definitely cause shortfall of remittances. There are assumptions of around 20% shortfall in remittance in 2020. Remittance is important for livelihoods and socio-economic development. This is major source of the foreign exchange earnings for Nepal. For the time being, particularly in this fiscal, import has gradually slumped and the decline in numbers of outbound travelers from Nepal could make adjustments.

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However, in the near and medium term, we have to look into substituting imports and expanding exports. We have to take this as an opportunity to promote domestic goods and services and make a habit to use domestic production.

Decline in remittance will hit the Balance of Payment or are we in a comfortable situation with import drop?

Balance of payment (BoP) situation could deteriorate at the end of the fiscal. We are looking into the alternatives. We will avail the credit available from the IMF. As we have low debt to GDP ratio, we can opt for foreign borrowings.

BFIs are being forced to issue debentures worth 25% of their core capital which they are selling at double digit interest rate. How we can lower the cost of funds that compel banks to take funds at high interest rates?

This regulatory requirement was introduced in the  Monetary Policy of this fiscal and majority of the commercial banks have already sold debentures. It will not be a rationale decision to suspend this provision halfway. Banks will adjust rates of debenture during subsequent issues. High interest rate of the debenture issued so far cannot be considered a decisive factor to keep the interest rate high. The portion of the debenture cost is nominal while calculating the base rate. Cost of fund will gradually come down, and we must bring it down.

Are you thinking about enforcing Counter Cyclical Buffer for BFIs?
This provision is included in BASEL-III as the conclusion of the global financial crisis of 2008 to protect BFIs from the cyclical systemic risk increasing in the economy. Buffer requires BFIs to hold capital when credit exposure is growing rapidly and that buffer can be reduced when the situation flips or environment becomes worse. The concept of this measure is BFIs can use capital buffers to cover losses and continue supply credit during the economic downturn. NRB has lifted the measure of creating buffer recently owing to the current situation but in the long run we will enforce it.

How will monetary and fiscal approaches be aligned to revive the economy hit by the corona crisis?

Definitely there will be coordinated approach between fiscal and monetary policy. The government is under pressure as  revenue sources are shrinking. In this context, we have to support the aspiration of growth through monetary measures. The Central Bank’s Monetary Policy will have to supplement attaining results targeted by the fiscal policy. 

You have served three decades in the Central Bank before being appointed Governor. What are your plans to strengthen the autonomy of the Central Bank and ensure overall financial stability?

Nepal Rastra Bank is a vital institution of the country. Leadership position is an assigned role where a leader is responsible for the outcome of the team. I will definitely play an effective role to execute  strategies, plans and policies set by the Central Bank to fulfill its objectives. I will work sincerely to develop NRB as a modern Central Bank ensuring autonomy of the monetary and supervisory institution. My experience of working in the Central Bank in the past will provide backing to guide the counterparties of the Monetary Policy to attain the expected outcomes and advance Central Bank as a regulatory institution with high level of integrity. I am always open to discuss with stakeholders and appreciate their creative inputs. I would like to urge all stakeholders for cooperation to cope with the challenges ahead.