World Bank and International
Monetary Fund has jointly issued an objection to Nepal Rastra Bank's recent
decision to fix the spread rate at 5%. Their main concerns are as follows:
i. Fixing spread rate will
discourage bank to give away loans that will eventually stifle the investment
environment
ii. Marginalized and poor people
who need loan will be greatly affected.
iii. With persisting stubborn
excess in liquidity, the bank will be discouraged to accept deposits causing
capital flight.
Taking everything into
consideration this objection simply shows how myopic and clueless international
agencies are with regard to ground scenarios of Nepalese economic condition.
Before going further into discourse one has to identify the root cause that
compelled NRB to take such drastic measure. This decision came in heels of
following prevalent scenario.
i. Commercial Banks were
providing morsel of interest to
depositors while making away with huge chunk of profit through interest on
loans.
ii. Bad cooperate governance in
loan practice led to large amount of irrecoverable bad debts.
Of course the NRB's decision was
simply a knee-jerk reaction to somehow contain the afore mentioned situation
but it is in no way as bad as portrait by World Banks critique. The reasons are
as follows:
a. Nepal's economy do not follow
the economic fundamentals of developed economy where fixing the interest rate
single handedly can manage the ills of
the entire economy.
b. Prevalent high liquidity and
the opportunity cost associated with it isn't the result of interest rate
rather it is because of lack of investment environment caused by political turmoil and absence of
proper infrastructure. So logic of
fixing spread rate will stifle investment is an oxymoron, since there is no
investment in the first place.
c. The second logic that
marginalized and poor people will be somehow affected is completely ludicrous.
Because poor and marginalized demographic have hardly been beneficiary for the loans. Commercial banks only provide loan
on frivolous luxury items such as car
loan to high income bracket who can pay off loans.
d. The third logic that the
capital flight will take place since bank will not be able accept deposit is by
far the most stupid reason. This is
because capital flight is already taking place as the current interest rate do
not even cover the inflation rate. The reason of proliferation of so many
cooperatives is by far tell tale sign of this situation as people are willing
to take more risk with promise of higher interest rate.
So what is the solution?
Since Nepal has taken the path of
economic liberalization the fixing of spread rate is certainly a regression.
But at the same time it seems NRB has no other option as well. But following
steps can be taken into consideration to
mitigate problem.
i. The root cause of all the
problems right now is uncontrolled inflation. The double digit inflation must
be curbed. If inflation is controlled then people will be encouraged to make
deposit even at low interest rate.
ii. Compel bank to charge high
interest rate on loan on luxury item.
iii. Make commercial banks
compete for granting loans to development program concerning public goods at lower interest rate.
iv. Put ceiling on the bonuses
and salary that banks pay to its high officials.
v. Compel banks to establish the
corporate governance by making it mandatory that they plough back the share of
profit in granting loans that addresses the need of poor and marginalized
community
vi. Provide financial incentives
to banks by reducing corporate tax rate, especially to those banks that provides financial
services to rural Nepal.
vii. Impose harsher punishment to
those who has committed loan fraud.
