Uttam Maharjan

The COVID-19 has whacked the world economy on an unprecedented scale. The extent of the damage to the world economy can be assessed more accurately after the disease has been controlled. Nepal's economy has also been hit hard by the virus as much of the economic activity has come to a standstill since the nationwide lockdown was enforced on March 24. Now, only essential businesses like those relating to food, vegetables, fruit, medicines, LP gas, milk and water are in operation.
As almost all the sectors of the economy are in the grip of the COVID-19 pandemic, the banking sector, too, is in trouble. The banking sector is considered the mainstay of the economy as it helps in setting into motion business and industrial activities, which, in turn, would get the economy rolling. As such, both the banking and business sectors should be allowed to operate without any letup. But, the pandemic, which is now affecting 212 countries and territories across the world, has dealt a blow to these sectors. That is why both the sectors are expecting relief in the form of stimulus packages from the government.

Discount on interest
In Chaitra 2076, the Nepal Rastra Bank (NRB) instructed commercial banks to provide a 10 per cent discount on the interest on loans payable at the end of Chaitra if the due installments were paid in that month itself. The NRB also instructed the commercial banks to extend the repayment deadline for loans to Asadh 2077 without any penalty interest and not to deduct EMIs till that period. In addition to these arrangements, the NRB has issued a circular to the commercial banks to the effect that the interest on loans should be reduced by two per cent, which will be applicable to the installments for Baisakh, Jestha and Asadh 2077. However, not all borrowers will be eligible for this concession. Businesses and industries related to food processing, production and sales, gas bottling plants and distributors, soap and chemicals, pharmaceuticals and distributors, internet and telecom service providers, tobacco and liquor and hydropower projects in operation will not be eligible for this concession.
The announcement of the aforesaid concession by the NRB has riled the banking community. The NRB has formed a study committee, which also includes some commercial banks so as to devise ways of how to give relief to both the banking and business sectors. The committee is still studying the situation and therefore yet to come up with a report. In the meantime, the NRB has announced the aforesaid interest rebate, which has startled the banking community.
The commercial banks argue that the two per cent rebate on the interest on loans will affect them adversely at a time when they are in the soup due to the prolonged lockdown. Due to stoppage of transactions barring cash transactions on a limited scale, their sources of income have dried up. The fees, commission, foreign exchange income and other incomes have wilted, while regular expenses like salaries and rents have to be borne. The commercial banks are ready to give a moratorium on the repayment of installments not only up to Asadh-end 2077 but also beyond. They are also ready to capitalise interest. These measures are designed to preclude the borrowers from defaulting on their loans. But they are not agreeable to a rebate of interest by 2 per cent.
The commercial banks fear that the recent decision of the NRB to waive 2 per cent interest may affect their profit. When the profit is affected, the tax payable to the government, bonus for staff and dividend for shareholders will take a hit. This shows that they are not willing to lose their profit at a time when they should play a big role in reviving economic activity by helping the private sector. On the other hand, they have reduced the rate of interest on deposits with effect from Baishakh 1, 2077.
Not surprisingly, the commercial banks expect some relief from the NRB. They want the NRB to make the credit to core capital-cum-deposit (CCD) ratio flexible so that more loans can be disbursed. When the lockdown is lifted and businesses and industries resume operations, they may need additional working capital ranging from five to 10 per cent over and above their existing loans. As they may face a liquidity crisis with a lower inflow of remittances due to economic problems in the destination countries, the commercial banks demand that the CCD ratio, which now stands at 80 per cent, should also be made flexible. It may be noted that as a relief measure, the NRB has slashed the cash reserve ratio by one per cent, which will release some funds for loan disbursement. Further, the NRB has increased the refinance fund to Rs. 60 billion from Rs. 50 billion.

Monetary tools
The current situation has paralysed the economy. Tourism, travel, trekking, hotel, cinema and such like businesses will take time to come back to normal. On the other hand, businesses and industries can resume operations soon. Here, the role of the banks and financial institutions comes to the fore. In fact, the troika of the government, the commercial banks and the private sector (businesses) should work synergistically to set the economy rolling. The government should waive taxes for the commercial banks to some extent and bring in foreign investments, while the NRB should come up with appropriate fiscal and monetary tools such as a flexible CCD to stimulate the banking sector.
On the other hand, the commercial banks should provide relief in the form of reduced interest for the businesses and industries affected by the COVID-19. However, the commercial banks argue that not all businesses and industries need relief as they had operated smoothly till the lockdown was imposed. The businesses and industries, on their part, should operate transparently and honestly and contribute to the economy of the country. After all, all the three should work in tandem towards reviving the economy of the country.

(Former banker, Maharjan has been regularly writing on contemporary issues for this daily since 2000. uttam.maharjan1964@gmail.com)