KATHMANDU, July 9: While Nepal Rastra Bank (NRB) is at the final stage of preparing the draft of the monetary policy for the upcoming fiscal year, experts have stressed increasing the central bank’s role in the supervision of the country’s financial sector and bringing in measures to increase financing in small and medium enterprises (SMEs).
Speaking at the parliamentary Finance Committee on Wednesday, former Finance Minister Prakash Sharan Mahat pointed out that NRB appears weak in its duty of monitoring the financial sector. He added that it should focus on stability rather than enforcing regulations, pointing out that the excessive investment of banks in real estate is one of the factors that have created problems for banks. “Banks face problems in loan recovery mainly due to the mindset of investors to appear rigid in not lowering the price of property valuation,” said Mahat.
According to Mahat, at present, monetary policy seems to be guided by herd mentality. “In the past, the central bank appeared erratic in its policy, which included excessive credit flows and too much leniency accompanied by the most tightened regulation. The NRB must come out of this roller-coaster trend in the next monetary policy.”
Revised interest rate corridor system introduced
The government also appears weak in maintaining allocative efficiency as it is unable to spend the allocated budget in the priority sector. Lack of proper regulation of the share market and excess government spending on low-return-yielding social sectors rather than on small enterprises and agricultural businesses are among Mahat's concerns.
Economist Swarnim Wagle holds that the economy has gone into stagnation mainly due to the liquidity trap resulting from the banks’ inability to increase credit flow despite reducing their interest rates to a pretty low level. “Unrealistic statistics of non-performing loans, utilization of remittances in non-tradable goods and services, and lack of good governance have held sway over the regulatory bodies of the financial sector,” Wagle added.
Min Bahadur Shrestha, former vice-chairman of the National Planning Commission, said the economic slowdown has resulted mainly from low capital expenditure by the government, huge embezzlement in cooperative businesses, and entrepreneurs seeking high returns only from realty businesses. “This has led to a surge in bad debts of the banking business,” said Shrestha, stressing the need for minimizing political interventions in the day-to-day operation of the central bank.
Nara Bahadur Thapa, former executive director of the NRB, said that the low financing in SMEs has appeared mainly due to the NRB’s policy of excessive mergers of banks and financial institutions. “There has been significant downsizing of financial flows to SMEs after the collapse of small financial institutions resulting from mergers,” said Thapa, adding that the implementation of short-term measures rather than devising long-term policy for structural reform has given rise to the present-day problems in the country’s financial sector.
