“Nepal now
has a rare opportunity”
Praful Patel , Vice President, South Asia Region, of The World Bank, spoke to Editor Madan Lamsal in Singapore on the eve of IMF-World Bank annual meeting held there on September 17-18. Excerpts of the interview centred on the strategies of this leading multilateral aid agency to help Nepal during the ongoing political transition:
President of The World Bank Paul Wolfowitz was saying that the bank has changed its policy of hiring technocrats with PhDs to advise on different projects. Would you please elaborate on it?
Our experience has shown that instead of bringing outsiders to solve the problems, it is better to build the local capability. So, we are paying a lot of attention on building local capacity in three ways. One is to make sure that the implementation of the projects is doable by the capacity that exists on the ground. We are also taking an approach to decentralise the project implementation and take it to the local level. Third, we are trying to ensure that the project design is not very complicated so that it can be implemented at the community level. An excellent example that such projects can be successful is what is happening in Nepal in the education sector. This is what our president was referring to. I would certainly reconfirm that.
Nepal is in transition. Reforms in a way have been stalled because of the Maoist problem. So, what approach will World Bank take now?
Right now we think Nepal is facing a very exciting prospect. It can pull through this transition. For this there are three or four things that need to be done in the next 12 months. First and foremost is to maintain the pace of reforms. We have seen that political transition everywhere has slowed down reforms. We have seen in Nepal that the pace of reform that had peaked last year has more recently slowed down. Thus our approach is to maintain a focus on that and encourage the government to continue with the reforms. This morning (Saturday) I met Nepal’s Finance Secretary with his team. Basically what we said is that while the political process is going on, the minister of finance has to make sure that he has a team in the ministry that is empowered to carry on the reform program. The second thing is that while this transition process is going on, the momentum has to be maintained in the implementation of the ongoing development projects.
We believe that these two go in parallel. Also the people of Nepal want the same. If you have development stopped and the peace process very complicated then the public will come to the streets.
Nepal is talking about an interim plan which could offset the PRSP. What will happen in that case to the World Bank’s different support programmes to Nepal?
You know that we have the country strategy programme that we negotiated with the government for four years from 2004 to 2007. Of these, the first two years have been completed during which we have provided $ 320 million. We have a portfolio of the projects from the grant of over $200 million. In the remaining two years we hopefully will provide a similar amount of money. Some of it depends on the progress they make on peace. The PRSP is linked to PRSC (Poverty Reduction Support Credit) that we are providing. Right now we are discussing for the next PRSC and that depends on the IMF’s PRGF mission that has successfully completed its working in Nepal . All these should go hand in hand. We can not do the PRSC which includes budget support without the PRGF. And this is also linked to the political process which should not derail. There we do see some risks.
Are there some other specific strategies considering Nepal as a country going through such a transitional times?
We should understand the difference between conflict situation and post-conflict situation. I think in the next 12 months we have to keep that in mind. We would try to address the macroeconomic reform programmes, macro stability in the governmental projects, social services etc. We are doing three things. First, we are maintaining our support on the macro-framework. Because, I think, if we lose that and we have inflation and fiscal instability and, as a result, the macroeconomic instability is becoming a problem, it can very quickly affect the population. As I said they will come to the streets. Second, we have also been asking our counterparts in Nepal what kind of support we can provide to the government so as to facilitate the peace process. And this could range from helping them to focus on every visible service delivery to the people (so that they get the confidence that this government is serious in providing services) all the way to facilitating dialogue with the different parties. We have offered that if it is useful we would talk to the full range of stakeholders in Nepal including the Maoists about the developmental agenda. And we are always very careful. We don’t do it without being invited. But if it is helpful we can dialogue with the Maoists too. The Maoists want the land reform today whereas the government says it will take time. In order that it does not become an issue of contention, we can come and bring in the experience of some other countries and help sort out the difference. And finally, we have kept our door open because we, like the whole world, are concerned about this window that is opened up in Nepal . It should not be lost.
What should Nepal do now to make sure that the reforms that have been made so far do not get rolled back?
Well, the reforms that are on the way have produced results. Remember that even in the very difficult scenario of Nepal has made very impressive progress in terms of reducing poverty, it went down from 41% to 31%. The economy is also growing fairly well. So again my first answer would be that continue the reforms, resist the temptations of stooping to the pressures to slow down the reforms. Second, continue the peace process as well. You know that there are solutions to all problems. The same applies also in case of resolving the arms issue.
What can Nepal do to benefit from the growth that is taking place in India and China ?
First you must have peace. Second, it is not very complicated to see that competitive Labour Act and open policies in terms of financial sector, manufacturing etc. will improve Nepal ’s competitive advantages. Nepal has a huge unexploited hydropower potential and these countries have a huge demand for energy. Also in manufacturing, if reforms are introduced and labour laws, trades laws and such regimes are rationalised, Nepal ’s products could be competitive in these fast growing markets. The inspiring instance I can give here is that of East Asia . Being around Japan , about 30/40 years ago countries like Malaysia , Philippines , Indonesia , Korea picked up the wind and grew very quickly. Now Vietnam is taking the same advantage of being in the right neighbourhood. There is no reason why Nepal cannot derive similar benefits from being in the right neighbourhood. Yes, Nepal is the 12th poorest country in the world today and it has a big population causing problems. On top of that the insurgency has cost the country quite a significant percentage of the GDP. But on the other hand there are countries that have gone through the same situation and come out of it and become successful. South Asia itself is poised in the growth path of more than 6 percent for next 10 years. So the window that is open for Nepal is a rare one.
The reforms, especially the financial sector reforms, initiated and supported by the World Bank and IMF, are unsuccessful. The bank loan defaulters are becoming more belligerent and roaming around freely. What is your observation? What lessons can we draw from this? What next step will the World Bank take in this regard?
Well, at one level, the financial sector reforms are not very complex. Everybody knows what needs to be done. In South Asia there are some countries which have done very well. The example is Pakistan . But at another level, all of these reforms really mean nothing unless they are enforced and implemented. That’s the problem in Nepal . This wilful defaulter issue is the one I first heard when I came in some three years ago. But it is still there in the same form. It means that a few very powerful borrowers who have influence, political as well as financial, are just ignoring all these rules, and not been brought to justice.
But again I was informed this morning by the Nepali delegation that measures like seizing their passports and enforcing the law that is there already are being applied by the government. We have been also pushing for the same for the last three years. But until you have the defaulters dealt with in a very public way nothing concrete will happen. You need to give very clear examples of dealing with the big ones, not the small ones. Today every person in Kathmandu knows who the wilfull defaulter is. Why is the government not taking action?
“Defaulters should not be allowed to exploit the loopholes”
While testifying before the finance committee of the House of Representatives in early August, the Governor of Nepal Rastra Bank, Bijaya Nath Bhattarai, handed over a list of major bank loan defaulters which made headlines in the press reports the following day sparking a protests from the business associations complaining violation of secrecy of their dealings with the banks. In this interview, Bhattarai questions the logic of the committee making the list public and explains his views on some crucial financial and monetary sector issues facing the country. Excerpts:
What was the compulsion for the Nepal Rastra Bank to make public the names of wilful defaulters on bank loan while the time granted to them by the finance minister to adjust their dues with banks was still a month away?
Thank you for first asking me about the most crucial issue of the financial system related to defaulters. Instead of making it public on our own initiative, the Nepal Rastra Bank as per the request of the Finance Committee of the House of Representatives made available the top defaulters’ list, in excess of Rs. 50 million, as submitted by the commercial banks concerned. It is a separate issue whether the media should be invited in such a meeting or not. There is no need to make a hue and cry as the bank has only performed its duty. Moreover, bank defaulters are blacklisted since a long time and the list is already on the website. Bank defaulters, irrespective of the central bank giving statements in the finance committee, can restructure or renegotiate the loan by the end of this month (Bhadau) provided both the parties agree to it as mentioned in the budget speech.
Does it not mean that the expenditure the NRB made the Nepal Bank and Rastriya Banijya Bank incur in newspaper advertisements by publishing the defaulters’ names was a mere waste?
One shouldn’t draw conclusion in such a way. Banks have made the names of defaulters’ public on their own. It’s part of their recovery efforts. However, as the custodian of the financial system of the country, NRB has its own responsibility to address the issue of financial stability. As one can easily see the NPA of the financial system is almost 5 per cent of the national income and a large chunk of it - almost 60 per cent - is accounted for NBL and RBB. So, NRB cannot remain indifferent on this issue. And, it’s also the responsibility of NRB to maintain financial stability as mentioned in the NRB Act. To address the issue of the NPA of the two large banks is a necessary precondition for the success of the ongoing financial reform programme and NRB is committed to this. Here, I want to make clear that it is a national issue and should be resolved by coordinated efforts of all stakeholders including the House of Representatives, the judiciary and the government.
While testifying before the Parliament committee you said there are legal hurdles to dealing effectively with the wilful defaulters. Would you mind elaborating on what sort of legal hurdles there are?
I was of the view that our legal system should help to make the financial sector reform a success. I was particularly mentioning about the cases with which defaulters brought stay orders causing delay in the recovery process whereas it took years to vacate them. With due respect to the Judiciary, it is a general feeling that there is a lot of scope for further improvements. Efforts in the establishment of a separate commercial bench are gradually taking concrete shape with due support of the Judiciary. My only concern is that the defaulters should not be able to exploit the loopholes of our legal and justice delivery system. Again, this is not an issue that only NRB has raised. Banks and financial institutions too have raised this issue time and again and the donor agencies have mentioned this in their reports several times. One can go through these publications in detail.
Has NRB suggested changes on the existing laws? And what has been the progress in this so far? What is causing the delay in legislating them?
If you look at the recent legislative reforms, you will find plenty of them. Enactment of the Debt Recovery Act, establishment of the Debt Recovery Tribunal, and a provision on Credit Information Bureau in NRB Act are the obvious examples in this regard. The Bank and Financial Institutions Act is being enacted. Now, along with the legislative reforms, there is a need to strengthen the capacity of the institutions concerned. For this, NRB is working with the Government of Nepal and Acts are being finalised. Similarly, laws relating to Anti-Money Laundering and Banking Fraud are in the legislative process.
What do you expect as the next step from the Parliament and the government after you testified in the parliamentary committee and made public the names of wilful defaulters?
As you are well aware, the ongoing reform programme in the financial sector is a joint agenda of the government and the central bank. Therefore, a concerted effort on the part of all stakeholders including the private sector is the need of the time. As mentioned in the budget speech, I am confident that the government will take a lead role in taking stern actions against wilful defaulters in order to resolve the burning issue of the NPA in the financial system.
What do you say about the logic of the business community that only a few persons or companies featured in the list are wilful defaulters while the rest are genuine industrialists who are suffering from the worsening business environment which is beyond their control?
I agree with the fact that the business climate has worsened during the last five to six years. But the large chunk of the bad debt particularly of the NBL and RBB was accumulated before that period. When the financial sector reform strategy was made public in November 2000, one of the objectives was to address the NPA problem of these banks, which had recorded almost at 60 per cent of total NPA. For your reference and the readers, large NPA of these two troubled banks was recorded during the 90s when the economy was growing at an annual average rate of 5 per cent, the highest rate of economic growth so far ever recorded. It is not the job of Nepal Rastra Bank to classify a borrower as wilful/non-wilful defaulter. Banks are better placed to judge their clients. I do not subscribe to the version of the borrowers who during good times do not pay the banks and do not service their debts - either principal or interest -and always try to make an excuse citing bad business or unfavourable business climate.
But it is said that NRB is defining wilful and non-wilful defaulters.
NRB is not at all involved in defining the defaulters as wilful or non-wilful. It’s completely up to the bank and financial institutions to classify borrowers on the basis of the criteria fixed in advance. To be precise, the criteria were fixed as per the commercial banks’ suggestions.
You also told the Parliament committee that the judges themselves have posed hurdles in loan recovery by granting wrong verdicts. As this is a very serious accusation for which you may be even made to face a contempt of court case, can you give specific examples of such dereliction of duty from the judges?
I believe I have already answered this issue in your earlier question and there is no further explanation necessary. So far as your concern about “accusation”, I have never made any accusation against any honourable court or judge. I have only publicly requested for the cooperation from all stakeholders including the Judiciary.
It is frequently claimed that you have not taken serious steps to deal with wilful defaulters as you were personally involved in approving some of these loans when you were on the board of directors of the bank concerned. What is your reaction?
You should be clear that I don’t deal with the financial sector in my personal capacity. I deal with the financial system in my capacity as the Governor of the central bank. Please take note of a number of measures taken by NRB during the last few years along with the introduction of financial sector reform programme. In addition to the legislative and institutional reform in a broader spectrum, a number of prudential guidelines have been introduced in the form of NRB directives. As a result of all the reform measures taken at both the macro and micro level, the NPA of all the commercial banks has declined from almost 30 per cent in 2002/03 to the current level of 14 per cent. I have left no stone unturned, as a Governor should do, for the development of a prudent and sound financial system. As to your question regarding my personal involvement on sanctioning such loans, I assure you that there has been no such case with any vested interest of mine.
The Credit Information Bureau is being used only as a blacklisting agency, i.e. a source of only negative information. Moreover, it does not keep records of small borrowers as the reporting threshold was increased in the recent past from Rs. 1 million to Rs. 2.5 million. So, it is not working as an agency that helps small business to get access to institutional credit. What is NRB planning in this regard?
I do not agree with this statement that CIB is being used merely as a blacklisting agency. It is a source of negative as well as positive information regarding borrowers. As far as the threshold is concerned; we are primarily interested in the information about big and medium size borrowers as they are major problem loans. Along with the expansion in the capacity of the CIB, its activities can be enhanced and widened in the future.
Let’s change the topic. NRB very promptly changed the provision of the latest monetary policy after there was strong opposition from a quarter of the society. It is interpreted as a proof to claim that NRB does not do enough homework before bringing out a new policy and that it encourages use of force rather than logic. What do you say?
I would like to reiterate that NRB as the central bank of the country has the responsibility of both the regulator and the facilitator. In discharging these responsibilities, it tries to maintain maximum coordination and consultation with the parties concerned. Therefore, it is baseless to say that NRB does not do its homework and succumbs to force. On the issue of the recent change in the monetary policy, let me note that we introduced capital fund policy taking into account the suggestions made by the banks. One should conceptually be clear that shareholders can contribute to increase core capital by themselves or it can be allocated from the retained earnings. And NRB, on the recommendation of the banking community, changed the policy, which does not have any effect on the core capital. I think it does not create any difference in the net worth of a bank whether shareholders bring additional money to increase the core capital or contribute from their retained earnings. In a prudent capital market, the price of a share is determined on the basis of the net worth of a company and prospects of returns in terms of future income streams. The reaction by the stock market clearly showed how shallow the market is. As economic fundamentals did not work, we had to make adjustments in the policy. And, the central bank is more focused on ensuring financial stability and promoting financial system development rather than meeting the speculative demands of the market players.
A demand is growing from some quarters of the business community to allow them to make investments abroad. What is NRB thinking about it?
Since Nepal is a small open economy, the impact of global economic development has been felt both from India and the rest of the world. We have been pursuing liberal economic policies since the mid-80s. Nepal has already opened her doors for foreign direct investment. But because of our strategic geographic location and weak macroeconomic fundamentals, it is difficult for us to open capital account in the near future even though we feel it is necessary in the medium term. It is also felt that Nepali investors are interested in investing abroad in competitive sectors. Currently, we cannot allow them to invest abroad mainly because of the restrictions laid down in the Ban on Foreign Investment Act 1966. Since these kinds of restrictions need a careful review in the liberalised context, we will work together with the government in reviewing the Act.
India is moving ahead with its plan to make Indian Rupee fully convertible also on capital account. As Nepal too has to move in tandem with the Indian policy in foreign exchange matters, what is NRB planning for Nepal in this regard?
For the second time since 1997, India has constituted a commission to make a study and offer recommendations on capital account convertibility. It is necessary to study the possible impact on the Nepali economy from the policy decisions taken by India on this issue. The Nepal Rastra Bank is closely monitoring the policy measures which the Indian government is likely to take on the issue of capital account convertibility. Although the macroeconomic fundamentals for capital account convertibility do not exist right now, we need to develop a sequencing strategy on opening this account gradually. In this regard, we are going to form a taskforce to study various policy options. We do not believe in a big bang approach. As we have liberalised major current account transactions, we will be reviewing various policy options in coordination with the government.
Private sector borrowers are complaining of high interest rates charged by the banks, while the interest rates on deposits are coming down steadily. Though the rates on deposits were hiked a bit after you threatened the banks immediately upon you being appointed the Governor, the rates are still very low. What are you going to do about it now?
NRB has followed the policy options so as to reduce the cost of fund to encourage private investment. For instance, despite the increasing threat of inflation, NRB didn’t change the CRR for the current year. This is primarily intended to lower the cost of the fund. Similarly, refinance rate on export credit, which was 3.5 per cent has been kept unchanged in the current year’s monetary policy. A provision is also made to assist crisis stricken industries by providing a refinance at 3.5 per cent. All these provisions are to encourage investors. On the issue of the direct involvement of NRB in fixing the deposit rates, it is a little bit unrealistic in a liberalised financial environment. If you look at it from a historical perspective, you will obviously notice a significant decline in the lending rates of banks and financial institutions. Similarly, if you calculate the weighted average spread between the deposits, it’s around 5 per cent. The deposit rates are still on the lower side particularly due to the excess liquidity in the economy owing to less demand for institutional credit along with the significant inflow of inward remittances. With the onset of peace and stability on one hand and tight monetary policy adopted by the central bank on the other, I believe the situation will gradually change. Our intention is that the market should function smoothly and competitively.
One school of thought says that the banks have been able to charge the borrowers high and offer low to the depositors because the stock exchange is not developed enough to serve as a viable alternate for both the investors and business. Simply increasing the number of banks is not going to help. What is your opinion?
Nepal’s stock market is at the earlier stage of its development. As the number of banks and financial institutions have gone up not only new products have been introduced but also competition has increased leading to a reduction in borrowing cost. Similarly, the financial market has deepened as measured by broad money to GDP ratio, which was 30 per cent in 1990 and now it is around 60 per cent. Similarly, commercial banks’ private sector credit to GDP has also increased significantly during the last 15 years. It was 11 per cent in 1990 and now it is above 32 per cent. These indicators along with the availability of a wider range of financial products are clearly showing the evidence that along with the quantitative growth of the banks, there is also qualitative growth in the financial system.
