'As an import-based economy, Nepal also imports inflation'

‘As an import-based economy, Nepal also imports inflation’

Business 360 caught up with Anukool Bhatnagar, SBI Career Global Banker, during his recent visit to Nepal for his views on how the financial sector of Nepal can cope with the challenges of the prolonged liquidity crisis and strain on foreign exchange reserves, which have adversely affected credit mobilisation in imports

Anukool Bhatnagar

SBI Career Global Banker

Anukool Bhatnagar is the Chief General Manager of SBI Bank, Chandigarh. Prior to that, he had served as Managing Director and CEO of Nepal SBI Bank (NSBL) for five years and also as Vice President of Nepal Bankers Association. Business 360 caught up with Bhatnagar during his recent visit to Nepal for his views on how the financial sector of Nepal can cope with the challenges of the prolonged liquidity crisis and strain on foreign exchange reserves, which have adversely affected credit mobilisation in imports. Excerpts:

South Asian economies have been facing strain on foreign exchange reserves or going through external sector pressure. Sri Lanka, for instance, is facing a massive crisis and Nepal, Pakistan and Bangladesh have been cautiously dealing with this issue. How would you analyse this scenario?

I would like to analyse this situation through two perspectives – first through the experience of having worked in Nepal for five years leading a joint venture and also as Vice President of Nepal Bankers Association and second, as a SBI career global banker due to which I have a perspective on how things work in neighbouring countries. Nepal has been singularly blessed with good people in the financial sector who really understand the world. They have travelled and studied abroad and know the pitfalls. Nepal is not going to face the problem that neighbouring countries are facing; it is perfectly safe. As per the global trend, the Nepali economy has also been facing challenges caused by the Covid 19 pandemic, Russia-Ukraine conflict, climate change, migration issues, among others. The global price rise in commodities has been hitting everybody across the world and Nepal also has been facing challenges to tame inflation at the desired level. But the basic core values of Nepali people’s hard work and Nepal keeps things very conservative. These two things have kept Nepal in a very good status. There is a run-on actual core capital of the country; there may be issues with cryptocurrency as this sector is unregulated. Other than that, I don’t see any threat. Tourism is booming again. It is true that the Nepali economy is based on imports but all the neighbouring countries are facing the same issues. While talking about Sri Lanka and Bangladesh, they are overleveraged and have availed a lot of debt. Nepal’s foreign debt is self-sustaining. The foreign debt that Nepal has availed is mostly from multilateral development partners and foreign debt liability is only 23% of the country’s gross domestic product (GDP). Remittances are a bit slower now, however, that is a global trend. I don’t foresee any issues for Nepal except inflation.

You have led Nepal SBI Bank and also served as Vice President of Nepal Bankers Association. Do you think Nepal’s financial sector is overheated as a result of the incentives provided to borrowers during the pandemic?

The country has very prudent practices. The authorities did what was required at that moment when Covid 19 had hit the economy hard. Even the largest economies of the world did not know what to do. They had also introduced emergency measures to support their economies through the financial sector. Nepal did what other developed countries too were doing during the pandemic. We all knew that as soon as the Covid 19 threat started minimising all the debt will be repaid. There have been multiplier effects on the economy as the pandemic prolonged. Even if the debt remains outstanding in the books of individuals or corporates, the benefits have gone to the general public. On the socio-economic front, we are not seeing people go hungry. There was no large-scale distress anywhere in Nepal, that all was because of these emergency measures. The benefits of relaxation extended by the central bank spread to every individual across the country. However, it is important to know that there is no such thing as a free lunch.

Nepal is heavily reliant on imports, mostly from India, and the country has also been seeking investments from India. What sort of economic partnership can Nepal leverage from India?

Nepal and India also share an informal relation and that will always be there. That is quite transparent though difficult to gauge as cross-border trade happens through informal channels due to the open border that Nepal and India share. The major issue is capital investment in Nepal. Currently, as a banker I think harnessing hydropower is very important and it must be done immediately in the next three years. India has been facing power outages and wants to move out from the oil-based power sources to clean energy. India is interested in buying power. India needs power and Nepal has the resources; this is a win-win situation for both. Likewise, tourism is another area of mutual benefit for both countries. The Lumbini and Ramayana circuits are coming up, that will add on to Pashupatinath to leverage the tourism sector. The number of Indian tourists coming to Nepal has increased significantly due to travel restrictions to travel to other countries. Nepal must capitalise on it as soon as possible.

Some banks in Nepal have proposed to Nepal Rastra Bank to issue Indian currency denominated bonds to sell in US dollars to Non-Resident Nepalis and other buyers. Do you think it will be possible?

Such bonds have a peg risk for Nepali rupee that is linked to the Indian rupee. Second, the exchange mechanism is such that Nepali currency goes via the US dollar route and then goes to Indian rupee. Either you have a straight bilateral relation with India like Bhutan does where INR is legal currency on both sides. In INR denominated bonds, you are bringing one other element of big fluctuation and this will have exchange rate as well as interest rate risk; it requires deep thinking.

What types of products could the banking sector issue to support foreign exchange reserves?

When I was here, I was propagating about takeout financing where insurance companies have long-term funds and banks have basically from 0-7 years. If they get into long-term infra projects — hydro, roads, rail — banks can’t manage liabilities for more than 7-10 years. They need insurance companies to take over the loans to their risk. Assets have to move from the banks after 7-10 years as per Nepal Rastra Bank’s consideration. That is one source here where local funds can be generated for long-term financing.

As an import-driven country, what impact could import restrictions have on the economy?

I’ll answer this in a blunt way. I’ve learnt here about ‘ka’, ‘kha’ and ‘ga’ where ‘ka’ means kamau (earn), ‘kha’ means khau (consume) and ‘ga’ means gumau (lose). Therefore, Nepal Rastra Bank has taken a real leadership role because if you don’t earn, then you shouldn’t be spending. At least you shouldn’t be speculating. In a bid to cool down two things — speculation and overspending in unwanted sector — NRB might have taken these initiatives. NRB might have been thinking that some of the expenses can be deferred for some time, which is why it has slapped margin on L/C and increased the risk weightage on import credit. These are temporary measures. When more foreign exchange starts coming in, they will lift such strict policies.

With your experience of working in Nepal, why are banks reluctant to lend in productive sector?

From the country’s point of view, credit actually should be channelled towards the priority sector. For other people like those who are in businesses and banks, it is basically a business decision. But it is not a directed lending sort of platform. First, the money should go to the sectors where the government, NRB and other regulators want in their wisdom. Then only should credit be mobilised in other sectors like imports, consumption among others.

It looks like the interest rates of banks will remain high for the next six months to a year. This will have an adverse impact on businesses struggling to cope with the effects of the pandemic, even those who were incentivised during the pandemic. What is your take on it?

As an import-based economy, Nepal also imports inflation. You don’t have much control despite the domestic efforts made to tame inflation. When the cost of raw materials and finished goods goes up across the world this comes in here and raises the local inflation rate, and then the deposit rate goes up. Investments are going into hotels, hospitality, industries and other sectors and there is a real shortage of liquidity. The demand and supply factor again pushes the lending rate towards the higher side. When people compete to get capital first, obviously the in-negotiation interest rates go up. It is then that there is a dilemma on whether the government comes out with interest subsidy to cool it down or Nepal Rastra Bank tries to lower the interest rate and inflation through Monetary Policy. These are very tough things and ultimately the rest of the country has to bail the businesses out. READ ALSO:  
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