Nepali Times: What is your assessment of Nepal’s macro-economic situation and the risks to the banking sector?
Anirvan Ghosh Dastidar: Nepal’s GDP composition is largely driven by the service sector which amounts to more than half of the total output. The pandemic has rapidly slowed down this sector which maybe causing majority of the aggregate demand subdue. A slowdown in services also means both consumption and production would be impacted since interlinkages between services, agriculture and manufacturing are very high in our economy. Though it may seem on the outside that Nepal’s economy is only consumption led – Nepal’s interlinkages to the global economy on both demand and supply drivers are very high. This also is one reason that the credit demand is quickly picking up after the lockdown was lifted which can be seen from the CCD ratio – since Nepal’s economy is dependent on drivers that may not need so much time for recovery like remittances and the service sector to drive majority of the demand, and, imports to drive majority of the supply.
Banks in Nepal are directly impacted by how the economy performs since there are no complex financial instruments in the system that stabilise or delay the impact of economic shocks. Most real GDP economic forecasts for Nepal have relied on a few assumptions: there will be localised lockdowns only until the end of 2020 and cases will gradually decline, economic activities will gradually return to normal starting 2021. Forecasts based on these assumptions estimate Nepal’s real GDP growth to be between 2 to 2.5% for 2020. I have a similar assessment for Nepal’s macroeconomic situation: if there is no second wave and there only are local lockdowns until the end of 2020 – Nepal will gradually go into the recovery phase and it will be quick due to the drivers of our economy.
Nepal Rastra Bank has allowed rescheduling and restructuring loans, would this provide relief or just postpone the problem given that economic activity is not picking up?
This would be completely dependent on how the economy would recover. If there is no recovery of economic activity, given a subdued demand, the problem would be there irrespective. In this case, there is no other option but to reschedule and restructure loans with an expectation that in the recovery phase things will get back to normal – this trend can be seen across the world, not only in Nepal. I think the factor causing the problem here should be understood well – the Central Bank Policy has in no way got to do anything with the problem, in fact these regulations are there by definition to ease the burden for all stakeholders in the system. The problem is external, which is dependent on market forces and these factors are beyond anyone’s control given the global pandemic. I am in fact appreciative of the efforts Nepal Rastra Bank has taken to stabilise the negative economic impact caused by this crisis – the impact would have been much worse if it were not for the effective actions of our Central Bank.
There was always a chronic liquidity crisis among Nepal’s banks, but that is not the reality now. Would this not be a time to prime up investment?
This is largely dependent on what you are investing in. However, on a broader scale, trying to invest now just because there is liquidity and prices of certain markets are low, would be a myopic view – one might also argue that interest rates are down so credit is cheaper. However, I think the fundamental laws of the markets and economics cannot be ignored. As long as the economy is down, so is the aggregate demand. When aggregate demand is down, an overall subdue in economic activities is bound to exist – this is a vicious cycle. Having said that, Nepal’s economy is slowly picking up because of an ease in the lockdown, but not in all sectors. I would thus say investment decisions would depend more on the sectors involved. The same time maybe prime for some sector and some investments, when it is not for some.
Do you see the possibility of mergers of financial institutions during this crisis?
There is no straightforward answer when it comes to mergers of financial institutions, and there are various academic arguments on various variables from economies of scale, synergy, efficiency of the industry, quality of assets and returns of the market the financial institutions are operating in. The sky is the limit for these variables. One can add the geographic argument and build a spatial model, one can also argue that traditional models miss the current trends of digitisation or new trends in the economy which may also have different implications to the debate and add these variables. Arguments also differ because of the tools and models which are used to analyse these variables – ranging from Optimized Mathematical Game Theory Models, Time-Series Econometric Models to even Economic General Equilibrium Models. Therefore, commenting on the possibility of mergers is very complicated and this should be based on various factors that are important to the market and industry in question. Ultimately, however, there are fundamental rules always govern any banking industry: a bank needs to be profitable to sustain and should comply with the rules laid forward by the Central Bank.
What would be Standard Chartered’ s strategy to ride out this crisis, and indeed see it as an opportunity for expansion?
There was an interesting article in Harvard Business Review on the Japanese way of dealing with a crisis which points towards a long term outlook of the society a business operates in. This article argues that the more we contribute towards the overall development of the economy and communities in the economy, the more we benefit. I think our purpose also follows the same concept which includes a focus on the long-term prosperity and economic development of Nepal which in-turn has a direct relationship to the banking industry’s health. We are committed to the sustainable growth priorities of Nepal and are focused on helping businesses and communities revive post Covid-19.
Having said that we have had our share of learnings during the pandemic and we have already devised plans to refresh our operating models. Our plans are geared towards enhancing our digital capabilities to support clients with their banking needs. We also feel, as have many institutions internationally, that our operating model will also consist of a refreshed health and safety standard where there will be a certain element of working from home even after the Pandemic. I think our focus is more towards supporting our clients recover from this crisis and keeping our colleagues safe, more than expansion.