Banks and other financial institutions were unable to expand their business as the interest rate in loans had increased four times and economic activities had not significantly increased. Returns had decreased significantly. We were hopeful of an economic dispersion after formation of a two-third majority government and political stability. However, the world has been taken aback by a sudden coronavirus crisis. Nepal cannot become an exception during such a crisis. Due to the lockdown, entire economic activities have come to a halt, and therefore, there was no way banks and other financial institutions would be immune to the crisis. Looking at the quarterly report that arrived at mid-April, we can see that banks and other financial institutions have been pushed toward a grave situation. If the government and the central bank are unable to provide aid to these institutions, this industry will face problems which will ultimately make the economy unstable.
Due to the limited economic activities, the government had previously decreased the expected rate of economic growth, and the Central Bureau of Statistics has further downgraded the projected growth rate to around 2 percent following extended nationwide lockdown. This shows how scary the situation will be. There is a state of confusion as to when the lockdown will end and how we should move ahead with it. Economic activities have remained at a standstill with just emergency and essential services carrying on. People have stopped going to the hospitals even for regular checkup. In absence of any economic activity, a decrease in the banks’ profit was expected. They have not been able to earn back the loan interests. During such circumstances, banks have been forced to manage their loss with provisioning. This was until the April. Lockdown has been extended multiple times since then and it is still unknown when it will end. Due to this, interest collection for the month of Ashadh (ending mid-july) also seems to pose many challenges.
Public Health and Economy, both together
There is no debating the fact that public health and safety is the main priority for the time being. However, in the coming days, the government will have to find a middle point in between public health, pandemic control and economic activities. Staying in a constant state of lockdown can lead to famine and people will start dying not from diseases but due to the unavailability of food. In order to kickstart the economy, the citizens should receive cash or other means of relief. Therefore, in order to relieve banks and other financial institutions from this problem, the government and Nepal Rastra Bank should adhere to a relevant policy.
Lack of open heart and mind to raise the economy
I do not see a possibility of relieving public health and the economy with a simple solution. It is extraordinary time for us and there is no extraordinary cure for it. Kickstarting the economy is the biggest challenge of the current time. Many countries are moving ahead while maintaining a delicate balance. In our country as well, if the government were to invest properly, the economy will rejuvenate and livelihood will carry on as well. We have been facing a lot of loss since the past two months and it is unsure how much we have to face in the near future as there is no way to measure it. A relevant policy is required to counteract this problem. By observing the world economy, the government should increase product consumption.
There is one aspect of the lockdown making the people unemployed and there is another aspect of the food and other products rotting away. Regular consumption materials have not to reached to the consumers. For many seasonal producers, the season for their products is slipping away. Now, there is no possibility of distribution of such goods and it is yet to be decided whether the raw materials will be useful for the next year or not.
Lockdown is not just a problem, it can also be taken as a possibility. We have fallen behind in many sectors, especially in terms of infrastructure and transportation. If the government is to invest in such sectors, it will create job opportunities and will develop our infrastructure as well. We must identify the sectors we might become independent in. Investment in agriculture, medicine, education and health will improve people’s livelihood. Currently, we are only discussing about the lockdown, however, we are not sure how we are going to move ahead with the treatment should the people start to become sick. How many ventilators do we have? It is essential that we work toward outlining how we are going to establish good health centers and develop infrastructure to support it. This will not only increase local health quality but also cut expenditure. It also provides local employment and adds toward developing people’s livelihood.
Misconception about banks and other financial institutions
There is a misconception about banks and financial institutions among the general public as well as various policy makers, which surfaces from time to time. Currently, the government and industries have been pointing that the banks have been accumulating huge profits that should be curbed and managed. It is important to understand that banks and other financial institutions are also companies and firms. The concept of profit and loss is defined according to the business. Banks have been accumulating huge deposits and providing loans accordingly. This is equally risky and has equal investment from the shareholders. Banks have been operating billions of rupees of the people’s deposits and the shareholder’s capital. Every bank has an average capital of 12/13 billions. This also needs to be returned.
In a huge risk to them, these financial institutions have been investing the depositors' money. Banks have the responsibility of keeping the money safe and return it back to them with interest. Considering interest and other expenditure, it is important to understand that the banks only earn a small margin of profit. The Nepal Rastra Bank has stated that the banks cannot increase the interest spread by more than 4.5 percent. Many businesses believe that the problem will be solved by decreasing the interest rate. That is, however, not a valid argument. Everyone has been affected by the COVID-19 pandemic. But it is not right to give equal relief to everyone. Every business should be studied and relevant standard for relief should be outlined.
The pandemic has narrowed down our economy. The government should focus on how it can improve infrastructure and decrease the expenditure of the banks by taking foreign loans. In doing so, the banks will also be ready to help. We must not be accusatory, we must instead develop a complementary mindset. In doing so, the government can generate revenue which can be helpful to run the state affairs. It is not only the government and the businesses that need to spend, the expenditure of banks is also very big. In such a hard time, we must move ahead with the spirit of camaraderie and not of hatred. In the coming days, it is important to discuss which sector might flourish. Banks arguing about not getting discounts and businesses arguing about not getting favors is ruining the environment and this is a completely disruptive mindset.
The act of pitting banks, business and the policy makers against each other should not be done. Those who have taken loans are protesting about the interest rates. Banks are also unable to provide relief. Therefore, it is essential, in the coming days, to not point fingers at each other and rather work together.
Decreasing interest rate
Currently, the Nepal Rastra Bank has ordered to reduce business loans flat by 2 percent. It is necessary to study about what sort of effects COVID-19 has had on businesses. How can the banks give two-percent discount on the interest rate for loans? If the banks’ ‘cost of fund’ will not be less, how can they give it? The central bank has asked to provide a two-percent discount now, it might next ask to provide a four-percent or even six-percent discount. How will the banks provide that? How will the banks earn it? Banks don’t have money themselves. Their return on equity is not high. For example, coronavirus may have affected 99.99 people out of 100, but it most certainly has not affected every person in a similar fashion. It is necessary to study the businesses’ balance sheet and provide relief accordingly. Currently, the government has provided a two-percent discount on interest. Will it suffice for every business? The government should provide relief according to the nature of the problem. How can we come out of such a problematic situation? Everyday, new situations keep arising. The government should change and activate its plans according to the situation of the global economy. Our plans will certainly fail if we move in with one size fits all approach. Situational resolution, therefore, is necessary.
Problems in management
There is some contention between the manager and the management in relation to the topic of interest. The governing body has stated the roles and rights of the manager as well as the management. But every organization has its own style of management. In the place where I am working, there is no contention between the manager and the management. Banks and financial institutions are managed by the management. In recent times, the contention created by the rule of lowering of the interest rate has created some friction between the manager and the management, which is really sad. It is important to maintain the trust people have on banks and financial institutions. This should be further solidified. It is necessary to talk in a responsible manner when dealing with sensitive issues. It is important that everyone should rise above their self-interest, and move forward.
Coronavirus has taken the world aback. Banks and financial institutions are no exception. It is important that the banks should support people in their decision to reduce their financial spending in the commercial sector. In times of crisis, banks and financial institutions have helped others and operated successfully. They will always move on. But it is important to change with time. Those who successfully capture timely opportunities move forward as leaders. It is not that banks and financial institutions have not faced troubles in the past. It depends on how they operate. If the banks move forward, hand-in-hand with the people, whilst systematizing the rules, they will certainly move past this situation.
No alternative to cutting expense
According to the quarterly reports, banks have shown lower income but the expenses remain the same. It is apparent that the banks have to move ahead with time and have to prioritize technology. The governing body has orderedthe banks to open many counters and to develop infrastructure accordingly. It is necessary to change in that aspect. Internalizing the new and emerging technology can help protect banks. Mobile and tablet banking can be used to provide in-home services. This can result in minimizing the cost and amount of manpower being utilized.
In the coming days, banks have to prioritize technological advancements instead of old practices and the governing body should make it legally acceptable. If we look at neighboring India, one can easily open a bank account with their aadhar card. We also have a system of mandating accounts with citizenships, but the authenticity of that is also questionable. Therefore, to push the bank toward modernism, the government should develop infrastructure to support it, with which, banks and other financial institutions should be able to provide exceptional services and the customers should also be able to avail that from their home. Banks and financial institutions should not just be seen as a place for employment. The rising work-force is increasing expenses. Development and utilization of technology, therefore, is important to re-task such human resources to other production sectors.
Importance of a dynamic relief package
As of now, India, and many other countries, have brought big relief packages to kickstart their economy. Currently, it is important for us to develop a dynamic relief package rather than a concrete package. Bringing in one size fits all relief package may not be useful.
Therefore, relief packages must be relevant and the government should not be stingy whilst bringing it. The package being distributed by the government goes back in terms of tax. Citizens and businesses cannot utilize it. As of yet, businesses have been running at a high risk. However, the revenue being generated by the businesses is being utilized for infrastructure development and national operations. An individual may not need relief, businesses need it. The government should consider its relief toward the business not as reliefs but as investment. If the government is able to invest in time and rejuvenate day-to-day activities, revenue will start increasing and will pave the way for infrastructure development. Prime Minister KP Sharma Oli's vision of 'Prosperous Nepal, Happy Nepalis, can be realized by this process.
(The author is chairman of Siddhartha Bank)
