Can Banking make the economy King again? Covid-19, Budget and Economy.

As of April 22, 2020, 10.30 GMT,

All over the world, the corona cases being 25,71,660 , death number being 1,78,281 and the recovered cases being 7,01,070 has dragged shutdown all over the world. The only positive development of this lockdown has been the growth of environmental quality. The ramification of the global crisis has impacted in each and every aspects of human life. All the micro-economic and macro-economic aspects of economy have been terribly hit by this pandemic. Forbes has stated that the Covid-19 pandemic has put the world’s largest i.e U.S economy in the ICU unit and it will be worse than EU and China. The world’s second largest economy i.e China’s economy shrank 6.8% in the first three months of 2020, the country’s first such contraction on record and a instant sign of the covid-19 pandemic. April world economic outlook projects global growth in 2020 may fall to -3 percent. Economies in Asia will see zero growth this time for the first time in 60 years, the International Monetary Fund (IMF) has said.

Talking about Nepal, Finance minister Yuvaraj Khatiwada has unveiled a total budget of NPR. 1.53 trillion for the fiscal year 2019/20 up from NPR 1.315 trillion of FY 2018/19. The government has set an ambitious economic growth rate of 8.5% keeping inflation level below 6% which looks certainly unattainable. The economic growth rate of 2018/19 was 7% and that looks like better figure if Nepal achieves it this year. First thing first, we need to focus on the budgeted amount allocated on the certain areas to deal with this pandemic, win over it and then go back to strengthening economy.

Rapidly increasing the living standard of people, rapid economic development with social justice and building foundation for socialism-oriented advanced and prosperous economy are the objectives of budget 2019/20. All the objectives of budget took a big hit by the covid-19 as well as failure of implementation of budgeted amount properly before covid-19. The budget for Visit Nepal 2020 as well as tourism infrastructure development is NPR 2.68 billion which is cancelled because of this pandemic but the road condition of Lumbini needs to be improved as it is the major stumbling block for Lumbini’s visit where people could always go and see the birth place of Light of Asia – Gautam Buddha.

Finance minister had allocated a whooping Rs. 68.78 billion for health and population sector this year however, this pandemic has shown the flaws of budgeted amount for health and population of this year and all budgeted amount of the previous years. Nepal government has allocated NPR 6 billion for health insurance program in all districts of the country. NPR 5 billion was allocated for building health institutions at the local level for providing basic health services at all wards although the simple testing kits of Covid-19 has not reached to all wards till today. The budget was also allocated for upgrading centre health laboratory into National Diagnostic centre and we all can see the negative progress by seeing

Nepal government’s late response to the pandemic. NPR 43.46 billion has been allocated for drinking water and sanitation sector and people are queuing up for water or walking kilometers for water not only during the pandemic but also before the pandemic. We need to feel proud that our finance minister has budgeted NPR 7.39 billion again for the Melamchi Drinking Water Project. Stating “No one will be hungry, No one will die of hunger in Nepal ”, Nepal’s budget amount of NPR 64.50 billion was allocated for social security program though we are seeing people walking out of Kathmandu to go home because of hunger and no security. They are ready to walk hundreds of kilometers and I am happy that they don’t know the Finance Minister’s word. As per the budget, the amount allocated for disaster management NPR 5 billion should be immediately released to prevent shortage of resources during disasters and this will assist immediate rescue during disasters.

NRB and Banking of Nepal – Current Scenario

Nepal Rastra Bank (NRB) is the central bank of Nepal which regulates all the banks and FI’s in Nepal. The major focus will always be on commercial banks as it is pivotal to country’s economy and plays important role in the development of the industry and trade of the nation. The role can be widely categorized under major headings capital formation, creation of credit, channelizing the funds to productive Investments, fuller utilization of resources, encouraging right type of industry, finance to government and so on. Finance minister has stated that access to finance will be enhanced while ensuring good governance and stability in the financial sectors. By implementing, Let Us Open Bank Account campaign, all adults will have bank accounts by the end of the next fiscal year. If it happens, it will be easy for banks to increase deposit base as well. As stated in budget, banking facilities will be guaranteed at all the centers of the local level. Mobile, Internet and branchless banking will be encouraged to increase access to banking services in remote areas. Concessional credit program will be made effective to assure that all individuals and groups can access to such credit. If this is properly implemented, then bank can have huge credit base as well.

According to current macroeconomic and financial situation of Nepal based on eight months’ data of 2019/20 published by NRB, the total number of BFIs licensed by NRB is 162 in mid-March 2020, of which, 27 commercial banks, 23 development banks, 22 finance companies, 89 microfinance institutions and 1 infrastructure development banks are in operation. The number of BFIs branches reached 9,640 in mid-March 2020 from 8,686 in mid- July 2019. Out of the total 753 local levels, commercial banks extended their branches at 746 levels as of Mid- March 2020. It will make people literate about banking and the depositing habit of people in bank will increase. Going through the report, deposits at banks and financial institutions expanded 8.0 % and bank credit to private sector expanded to 10.1%. On y-o-y basis, deposits increased 16.1% and credit increased by 14.8%. In the review period, inter-bank transactions among commercial banks amounted to NPR 1227.63 billion and among banks and financial institutions(excluding transactions among commercial banks) NPR 110.05 billion. Such transactions were NPR 991.28 billion and NPR142.59 billion respectively in the corresponding period of the previous year.
NRB – To win Over Covid-19 pandemic

NRB announced a number of relief measures such as rescheduling of loan payments deadline for business organizations affected by the Covid-19 pandemic on 16th Chaitra 2076. Borrowers who were supposed to pay loan installments to banks and financial institutions in mid-April can now pay the installment by mid-July. Banks cannot impose penal interest or downgrade any loans for delays in repayment, according to the central bank. If the borrower pays the amount as per the set deadline in mid-April, the concerned bank or financial institution will need to provide a 10 percent exemption in interest, according to a directive issued by the central bank. These facilities are applicable to borrowers from all sectors according to Gunakar Bhatta, spokesperson of the central bank.NRB also made major decisions to inject liquidity to the economy which are lifting up countercyclical buffer and reducing cash reserve ratio.

Countercyclical Buffer (CCyB) – Lifted out
During this Covid-19 pandemic, NRB issued notice no. 18/076/77 on 16th Chaitra, 2076 stating the countercyclical buffer as per Capital Adequacy Framework 2015 has been lifted out. This will certainly help in this vulnerable economic situation because of pandemic. BASEL III marks the introduction of two buffers: Capital Conservation Buffer(CCB) and Countercyclical Buffer (CCyB), intended to protect the banking sector from period of excess credit growth. NRB had laid down its plan to enforce countercyclical buffer ranging 0-2.5% for commercial bank as part of the macro prudential norms before. Bankers had feared it will hit lending capacity that time. But, it was a wise decision to make for the regulator because central bank had already sensed there could be risk in banking industry when the credit continues to expand and on the particular scenario, banks will have enough cushion to absorb such risks. It is helpful during this pandemic now. In Nepal, NRB had increased the Minimum Total Capital Ratio to 8.5% thus making total capital adequacy ratio 11%. Monetary policy 2019-20 has mandated commercial bank add an extra 2% capital as countercyclical buffer, the capital adequacy ratio has surged to 13% and it looks like a wise decision taken now.

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Cash Reserve Ratio (CRR) – Reduced from 4% to 3%

NRB issued notice no. 18/076/77 on 16th Chaitra, 2076 stating Cash Reserve Ratio will be decreased to 3% from 4% which will pump additional liquidity of NPR 35 billion into the banking system which will help banks have adequate means when loan demands increase after the current crisis is over. The current situation in the economy is extremely fragile and it requires massive dose of monetary stimulus. It will be massive boosts to commercial banks, as it needs to survive deposit shocks for going ahead because deposit will be less, withdrawal will be more and repayment of installments of loans will certainly decrease. Hence, such cash can be used in this difficult time of the pandemic. It helps banks to reduce their lending rates and aid in monetary transmission. NRB has increased liquidity in the economic system aswell. NRB reduced CRR to increase the flow of money in the economy. Cash Reserve Ratio refers to a certain percentage of total deposits of the commercial bank which is required to be maintained in form of cash reserve with the central bank. The primary objective of such reserve is to prevent the shortage of funds in meeting the demand by the depositor. Other objective of CRR is to keep inflation under control. During high inflation, NRB raises the CRR to lower the bank’s loanable fund. It is also a way of controlling the excess flow of money in the economy and helpful to increase liquidity in economy when required.
Can Banking make the Nepal’s Economy King again?

When the corona virus pandemic started, whole world changed overnight so as economy of the whole world. Everything that could be done online started being done online. The world was digital instantaneously. In case of bank, Why would a financial institution requires customer to visit branch for opening account or applying the loan? It sounds silly that customers used to visit branches for above mentioned activities. Sharp slowdown in credit growth is expected and the non-performing loans may rise resulting in deterioration of asset quality across all banks in Nepal. But, the question is, Can banking help the economy to rise again? There are certain helping measures which are discussed below:

Help by CCyB, LCR and NFSR.

As per the monetary policy 2019/2020, it was stated that the provision of countercyclical buffer as a tool of macro-prudential regulation will be effectively implemented. In addition, standard for Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NFSR) will be issued. The liquidity crunch has been the major problem in banking economy, countercyclical buffer will greatly aid in this scenario. Liquidity coverage ratio (LCR) prepares banks for short term resilience at time of severe liquidity stress scenario. The banks maintain an adequate LCR to ensure an adequate level of High Quality Liquid Assets (HQLA) which can be converted into cash to meet its liquidity needs that can last for a time horizon of 30 calendar days. Like LCR promotes resilience of banks for a shorter period of time, Net Stable Funding Ratio does the same for a longer horizon of time. The purpose of NSFR is to ensure banks have enough incentives to fund daily based activities with a stable source of funding.

Help by Repo and Reverse Repo Rate adjustments

Reverse repo rate is the rate at which Nepal Rastra Bank borrows money from the commercial banks within Nepal. It is a monetary policy instrument which can be used to control money supply in the country. An increase in reverse repo rate will decrease the money supply and vice-versa, other things remaining constant. An increase in reverse repo rate means that commercial banks will get more incentives to park their fund with NRB, thereby decreasing the supply of money in the market. Likewise, the Repo rate is the rate at which NRB lends money to commercial banks in the event of any shortfall of funds. Basically, repo rate is used by monetary authority to control inflation. In the event of inflation, central bank increase repo rate as this act as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and checks inflation. Repo and reverse repo rates form a part of liquidity adjustment facility.
The adjustment of repo and reverse repo rate by the NRB will help to create economy better and deal with this pandemic. NRB should ensure adequate liquidity in the economy to ease the financial stress caused by the Covid-19 pandemic. NRB needs to reduce the reverse repo rate so that the banks will lend to the productive sectors of the country. NRB needs to adjust repo rate as well so that banks will borrow from the central bank and lend it to higher productive areas which will help in boosting the ruptured economy. Reserve bank of India cuts reverse repo rate from 4% to 3.75% in the wake of corona virus crisis in India. This will reinforce monetary transmissions so that bank credit flows on easier terms and the policy measure taken by RBI will sizeable expand liquidity in the system, which will ensure that financial markets and institutions are able to function normally in the face of covid-19 related dislocations.

Encourage Productive sector lending – Stimulus for Growth and Loan Modification

Productive sectors are the real sectors of the economy as it represents the livelihood of the people as they directly address the problem of low productivity, unemployment and food security. After the pandemic, it will have more importance to deal with the severe effects and make economy rise again. Over –exposure to unproductive sectors drives up asset price building inflationary pressure, reducing the value of money. Concerned with the over-exposure of BFIs to the unproductive sector, the NRB has taken initiative to lower their share in such sectors. Banks should help the regulatory most this time around.NRB should teach supervisors and clearly communicate to banks to be more proactive in their loan portfolio for those borrowers and sectors that have been hit hard by pandemic. The regulatory should also remind banks about flexible credit risk management and the accounting standards for impairment in these situations.

Nepal’s economy is very small compared to that of developed nations and previous recessions did not hit Nepal as hard as it hit to the developed nations and world’s biggest economy. So, a proper and timely measure taken by the central bank and the wise performance of banks collectively will certainly heal the cramps caused by the covid-19. Banks are ailing and the longer Covid -19 lingers, the wider economy dooms. This pandemic will certainly have an unfortunate and inescapable outcome as it had dragged the lockdown with itself in the whole world. The normalcy cannot be guaranteed at the earliest post lockdown even after business comes to the full swing but proper guidance of the regulator and the smooth functioning of banks will certainly make economy come to the line. As the deposits at banks and financial institutions has expanded and bank credit to private sector has expanded aswell during past months showing positive prospects. Likewise, inter-bank transactions among commercial banks as well as transactions between banks and financial institutions have increased this year which is also great sign. Banking assess in Nepal has increased this year as out of the total 753 local levels, commercial banks extended their branches at 746 levels as of Mid- March 2020 which will assist in lifting up economy of Nepal. So, being affirmative and optimistic, it will take some time but wise banking can make the Nepal’s economy king again.

Name : Sugam K.C
Qualification : MBA-(WES certified)
Profession : Banker (working now at Laxmi bank as an internal auditor)
Mob. No. 9851008660

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