Friday, July 18, 2014

Nepal Rastra Bank : Frankly my Dear, I don't give a damn!

Disclaimer! : This isn't a sarcastic post. Just a personal frustration over the central bank behavior

First, they gave license to any business entity trying to get into Banking and Financial Sector. Their logic was that it will increase access to financial services in the nation. But, all the BFIs were urban area centric. Even their policy to make BFIs have mandatory branches in the rural areas isn't having any impact on overall access to financing. Far better are the smaller cooperatives and microfinance institutions, who are active in the grassroot level. But, impact of this sector too is corrupted by high interest rates.

After few years and few governors,  the NRB fellas found that there were too many BFIs in the nation. They brought Merger Bylaws and then Acquisition Bylaw. Their point was that the nation is too small to have so many institutions. NRB states that they have far few people to oversee so many institutions? Haven't they learnt anything from 2008 Financial crisis? Are they not creating institutions too big to fail? One Gurkha Development Bank had such big ripple effect in the economy. Imagine what would a failure of commercial bank with over 20 billion in deposits have  in the economy? Fewer institutions also means that the sector is moving towards monopolistic economy. (See for Herfindahl index). How will this further suck the consumer interests?

And, after years of downturn and consolidation, the Nepalese economy is finally coming up. The domestic and foreign investors are upbeat about the economy. Investments and investment commitments are rising. The budget has prioritized capital investments and has created favorable environment for infrastructure development. Be reminded that infrastructure projects are capital intensive. Right then NRB comes up with monetary policy to suck up the "extra- liquidity" from the market. Agreed that the market is high on liquidity, and agreed that this could lead to bubbles in stock market and real estate. But there could have been directions to avoid these bubble creations rather than just increasing the CRR, which is expected to drain the market with NPR 6 billion instantly. (This is like 60 MW hydropower project with full equity). The ripple effect of this will be swift. I don't think the government doesn't have enough expertise and resources to take on all the infrastructure projects single handed. It needs equal, if not more, participation from the public. With NRB trying to mop up " excess- liquidity", the interest rates are bound to increase, so will the costs of projects. This will further damage the investment environment.

It seems NRB is always on trial and error mode. Maybe, it is because the governors and the board changes after their tenure and are not accountable to anyone for their decisions and policies. What happens if their decisions backfires or their tests fail? Who is NRB accountable to?

Do they really care for the public or the development of Nepal or they just churn out policies and bylaws because some damn economist published these in some weird journos. I think it is time NRB is held accountable for their policies. Only, then will they see the bigger picture and analyze the impact of their policies on the overall economy. 

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