"NRB is not to penalise banks"

Dr. Tilak Rawal resumed as NRB Governor the hard way in April last year after winning a nearly eight-month long legal battle with the government (NBA May 2001) following his unceremonious removal from the office in August 2002. His nearly one year long tenure so far as the chief monetary officer of the country, has been a land mark period in Nepal's financial sector reform under which a number of significant changes have been initiated. In an interview with us he shares his side of the controversy going on about some of such new measures. Excerpts:

How is the revised timetable for handing over the management of NBL and RBB to the international consultants?

As far as the question of Rastriya Banijya Bank (RBB) is concerned it’s going to be done pretty soon. An agreement has already been reached between Nepal Rastra Bank (NRB) and the Deloitte Touche Tomahatsu, the company selected to take over the management of RBB. The work should start within a months time.

There were reports of massive withdrawal of bank deposits during the second week of January attributing it to VDIS. How much is the effect in your estimation?

No, its not true. Banks sometime should become little bit sensitive and draw a little more than what is required from the central bank. They also sell the treasury bills to the central bank. This we noticed. There is no need to panic, everything appears very normal now. Neither is there any capital flight.

Despite a huge trade deficit with India, Nepal has a large reserve of Indian currency and you have gone on record attributing this to the Nepalis working in Gulf who repatriate money to Nepal in IC hundis, not in convertible foreign exchange. What is NRB doing to correct this?

There are several reasons for an increase in the reserve of Indian currency in the central bank. One of the reason is definitely what you just have said. There are other reasons as well. Instead of using Indian currency reserve to import goods from India we have allowed goods import from India against payment of hard currency. This has also contributed to increase Indian currency reserve.

But I don’t see any reason why we should be so worried about the increase in the Indian currency reserve. It’s simply a question of making productive use of Indian currency reserve with us. I have had some discussions with the Governor of Reserve Bank of India (RBI) and we have been assured that they are looking into the possibility of letting us invest our Indian currency reserve in long term debt instrument as well. So if you can make use of Indian currency reserve and get good returns from it, there is no need to panic. Secondly if your Indian currency reserve is at the cost of hard currency reserve then you have to be little bit sensitive and worried. But our hard currency reserve is also quite comfortable. So I don’t think we have to worry a lot about it.

NRB has been investing considerable amount in Indian Treasury Bills. Can you give us an idea about this amount as of the latest information you have?

Yes, we are investing in the treasury bills in India which is a short-term instrument. In 91 days Indian TBs we have 12 billion rupees, in 14 days it is 50 crore rupees. Now we have requested the Governor of RBI to let us invest Indian currency in longer term debt instruments. In that case we would get about 8 to 9% return which we are not allowed as of today. I am sure that they will look into our request very positively.

How have been the latest developments in the proposal of Credit Agricole Indosuez to divest from Nepal?

We have received a letter from Nepal Indosuez stating that Credit Agricole is interested to divest its share in favour of a group led by Mr. Prithivi Bahadur Pandey. We have returned a letter to them and they have already replied to that as well. We are also informed that Credit Agricole had entered into an agreement with Mr. Binod Chaudhary also to sell Chaudhary the shares long ago. Now Chaudhary has gone to the court. Therefore, we are little bit confused at the moment. We are just watching the situation carefully and we have not yet made any decision in this regard. In a normal situation we should not be objecting the buyer selected by Credit Agricole. But if special circumstances emerge we will have to be more careful and look into the matter in a greater detail.

How is the progress report so far regarding the compliance of the recent NRB directives to the commercial banks? NRB has taken some actions against some private sector banks, but how about the compliance from NBL and RBB?

Well, they are in a pretty bad position. They cannot comply with the directives of the central bank cent percent. If you look at their share in total deposit and total loan outstanding you can’t just ask them to stop functioning. Some waiver had to be granted, and we have granted that. As far as other banks are concerned they have no major problems and objections. But since the economy itself is not in a very good condition and banks are also finding a little bit difficult to function properly, they have put before us their problems. We are looking into the genuine problems and concerns of the banks very sympathetically. But we’re not going to withdraw the prudential norms made public. We could treat special cases of some of the banks on case to case basis.

Based on the experience of more than six months, are there any chances of the revision in the directives?

We have been receiving complaints and genuine problems and we are looking into them. If we find any of the problems or concerns expressed by the banks and other knowledgeable people being of serious, genuine nature then we will definitely amend the directives. Otherwise we will strictly enforce what we have made public. And I repeat, these norms will do good to the banks in the long run.

The latest reduction in CRR is described as insufficient to fight the ongoing economic slowdown and NRB has not done anything to the demand of the banks that new loans to sectors like carpet, garment and tourism be recognized as ‘priority sector loans’ so as to make the reduced CRR effective in its objective. How is your comment?

As a result of the reductions in CRR, 200 crore rupees were released into the economy. This has been done with the objective of helping the banks reduce the rates on loan without a corresponding reduction in the rates on deposit. NRB cannot be expected to intervene or everywhere. We are monetary authority. We tried to drive home a message of flexible and accommodative monetary policy. We reduced refinance rates. We reduced hard currency refinance rates on export loans which was 4% earlier. We brought it down to 2% and have instructed the banks to charge not more than 4% to traders and exporters. If they want, they can get refinance facility in hard currency from us at 2%. We have also reduced the refinance rates for the banks to help the sick industries, hotels, airlines, etc. Initially it was 4.5%. Now we have brought it down to 3%. The finance minister had clearly stated in the budget speech for the current fiscal year what NRB would do to help the sick industries. So we have worked along that line. If someone expects that we should be directly involved as intermediary between industrialists, hoteliers, airline operators etc., I say, NRB cannot get into that kind of role.

Critics say that it is immoral to allow the commercial banks enjoy the profit from devaluation gain they derive from investing in foreign currency reserve. How is the view of NRB?

They have to place certain amount of foreign exchange reserves outside the country. They have the import obligation, L/C obligation and all that. I think the tendency now is not to place much money in the form of hard currency outside because of sharp decline abroad in interest rates on deposits. Of course, when rates were attractive outside the commercial banks had to make profits. But now there is not much incentive for them to do that. So this is not a problem now. Moreover, you cannot blame commercial banks for trying to place their reserves outside. If the commercial banks don’t make profit how will they survive?

The business community is furious at NRB’s recent rule requiring Business Credibility Information (BCI) for L/C business. They say it is unnecessary because the existing measures are enough to control possible forex deflection and this is particularly against the interests of those who trade overseas as the business with India and Tibet are not covered by the new rule. They also say that since there is only one party in Nepal that can provide BCI it is particularly for the benefit of this monopoly that NRB has brought out this new rule. What is your reaction?

When this decision was made I had clearly stated that the arrangements made now will be carefully reviewed in three months time. Now you don’t have to wait that long. It can be reviewed tomorrow, day after or in seven days time as well. But these people are just interested in making noise. Look at the noise made about Voluntary Disclosure of Incomes Scheme (VDIS). But the finance minister and the government didn’t budge an inch. And they did the right thing. But in our case it is not that. We are going to review it. But a system has to be built. You are aware about the misuse of the facilities granted. But I would like to reiterate our readiness to review it. We do not know how many companies and firms are there in the country that can provide business information. In our decision we have not specified any firm. If we have only one today, that one agency will provide the information now. You will have ten firms tomorrow and you will have the choice to go to any one of them. To look at the situation or the practices in other countries, the amount is 500 thousand Takas in Bangladesh, in India it is much lower than $15,000. In Pakistan also it is much lower. We have put it at $15000. But I repeat, we are going to look into it and if required we will make necessary changes. We don’t want to wait even three months.

The experience so far has proved that the private sector commercial banks are not going to go to the rural areas, leave alone the remote areas, however hard NRB may coax them. Similarly, the Rural Development Banks also have been proving themselves to be economically not viable. How advanced has been the search so far for more viable alternatives such as postal saving banks for the remote areas?

Well, the progress on the wish of NRB that the commercial banks go to the rural areas is not highly satisfactory. But at the same time it is not discouraging either. They are extending their networks to the rural areas. In order to open branch in urban areas they have to open a branch in rural area as well. Slowly they are expanding their network. You have rightly said that they are not keen about expanding their branches in the rural areas which are definitely difficult to operate. We should also not try to force these banks expand their operations in the areas where they do not feel very comfortable to go. But looking at the present position we have made some arrangements for these banks to extend their network to the rural areas as well. And they are complying. In addition to these commercial banks there also are development banks both publicly and privately owned. They too are expanding their network. Similarly, micro credit agencies are extending their operation. So private sector is also coming in a very aggressive manner. Until recently you would have to rely only on Agricultural Development Bank, RBB and NBL to provide banking services to rural areas. But now you have even private sector agencies working on these areas. You have rightly said the five regional Rural Development Banks( RDB) are not doing good from profitability standpoint. So they need some support from Central Bank as well as from HMG/N. We have done something in this regard already. But if you look at the benefits provided by these regional banks, it is immense. If you quantify the social benefits of these banks you will have all praise for them.

The basic question today is on the security situation in the country. I have told both the prime minister and finance minister that the economy of the country now is influenced by non-economic factors. So the priority of the government should be to concentrate in maintaining law and order. Of course, RBB and NBL have withdrawn from some parts of the country on security grounds. They have been advised by local administration, in certain cases, to wind up their operation. But good thing is that there are private agencies also today operating in the very rural areas. But they will also find it very difficult to operate if the law and order situation does not improve. Thank god, it’s improving recently. Things are moving towards positive direction. I hope things will improve much more in the days to come. Once the law and order situation is maintained I see no problem.

Can you give us an idea about how has been the utilization of the penalty that NRB collects from the commercial banks that fail in meeting the targets on priority sector lending?

As I remember, 10/11 months ago a bank was fined to the tune of little more than one crore rupees. These days we are not very serious about it. We do not just believe in penalising the bank and making money. In my tenure, so far I have not done that. But if I find some bank violating it very seriously then we may take action.

We have not designated a specific area for this money to be invested or utilized. NRB is doing so many things. It has got banking development promotional programme and it has supported these regional development banks in a big way.