The State should take the Responsibility of Revitalizing the Economy, Raising the Economic Condition of the Common People and Reducing Poverty

Poshakraj Paudel : Citizen Life

What is the role of the state in economic revival and economic prosperity? If you try to regulate from the street, the economy will go haywire, and the country itself is in danger of going to be controversial.

Banks and financial institutions are responsible for managing the deposits collected from savers in a safe manner. The capital collected and created by the banks is mobilized in the areas of increasing production and income of the country and creating jobs through these banks.

Savers who mobilize their capital through banks and financial institutions have the right to get reasonable returns. In order to protect the interest of the savers there is a legal provision that punishes as a banking offense if the loan is misused or caused by mobilizing deposits.

According to the recently released ‘Financial Literacy Base if Survey’ by Central Bank, 71.83 percent of the adult population depends on moneylenders, family and friends for savings or loans. That is, only 18.17 percent of people are dependent on banks for savings and loans.

According to the National Economic Census, 64.5 percent of the 9.21 lakh registered and unregistered institutions/establishments either do not need loans from banks and financial institutions or are not eligible to receive their loans.

According to the World Bank’s Global Findex Database 2021, only 14.1 percent of the population above 15 years of age have access to loans from formal banks and financial institutions in Nepal.

The data shows that a large population is outside the credit reach of formal banks and financial institutions. A large part of the loans of banks and financial institutions are in the hands of accessors.

At the request of large and accessible borrowers during the COVID-19, a package including discounts, reloan additional loans was brought to them. In other countries the cost of COVID-related packages is being researched by the state itself.

But in Nepal, the COVID-19 aid was mainly provided to borrowers from banks and financial institutions. Moreover, the costs of such assistance were indirectly passed on to savers and bank shareholders.

Entrepreneurs and common people who did not take loans were completely ignored. Due to the state, the claim payment of corona insurance made by paying the insurance fee is yet to be received by the common people.

Undoubtedly, industry is the backbone of the economy. But businessmen who take loans are the backbone of the economy since the COVID period.

When the economy is weak, about two-thirds of the professional organizations/establishments and about three-fourths of the adults who do not take loans may be in trouble. The option of asking each other for help or volunteering is also open. But the interventions that cross the scope of each other have now crossed the line.

Of course, it is a weakness of banks and financial institutions to provide loans with variable interest rates even to those with a fixed income. In the past, the banking sector simply transferred interest rate risk to customers by changing the interest rate on savings or offering variable interest rate loans.But now the option of fixed and variable interest rate is also open in the loan. However, people or organizations with fixed income have chosen variable interest rates knowingly or unknowingly. Isn’t there a lack of banking literacy? Common borrowers may not yet have the level of awareness to manage the risk of interest rate changes.

Therefore, it seems that borrowers who have stable income and cannot take interest rate risk should be allowed to take fixed interest (lock up) loans only. But banks and financial institutions are still using the loophole to transfer the risk of interest rate changes to borrowers and savers.

Those who can lead and take risks by building an organization become entrepreneurs and businessmen, establish business establishments. Entrepreneurs and businessmen have ambitions to be successful sooner or later and most also have managerial acumen and vision.

According to the 2018 National Economic Census of Nepal, only 35.5 percent of those entrepreneurs took loans from the formal sector. Entrepreneurs who do not take loans tend to be more flexible and have more access to grants, concessions and facilities.But savers who provide capital through banks to borrowers, entrepreneurs, businessmen and even the government are actually ordinary people. The general public includes children, the elderly, workers, the poor, women, self-employed, farmers, self-employed entrepreneurs/businessmen, national servants, housewives and retired people.

Common savers are those who spend their lives on the edge of earning a living. That is why while the loan accounts of banks and financial institutions are only 1.8 lakh, the number of deposit accounts of savers is 4.87 crore. Apart from that, there are about 1.31 crore savings accounts in microfinance financial institutions and cooperatives.

The purpose of the Bank and Financial Institutions Act 2073 is to increase public confidence in the banking and financial system, to protect and enhance the rights and interests of depositors, to strengthen and strengthen the national economy, and to provide reliable banking and financial services to maintain financial stability.

But now these seemingly contradictory and yet complementary objectives have come into conflict. Shouldn’t common people have equal access to the capital created for the overall economic development of the country? In Nepal, inflation and imports have been controlled by raising interest rates, due to which the costs of borrowers, businesses, industries and banks have increased, and the credit risk of banks and financial institutions has increased.

Some people are protesting on the streets and campaigning against the bank’s excesses. Although it looks anti-bank, such a campaign can affect the future of capital construction for the country. It has become almost impossible to find an acceptable balance point between conflicting policies.

According to the 2018 National Economic Census, 3.27 lakh micro, small and medium entrepreneurs avail credit from the formal sector only. Apart from that, among the main borrowers who avail the loans of the formal sector are large and individual borrowers. Let us call it a feature of Nepal’s banking sector or say it is different from foreign countries, most of the bank loans are provided only on mortgage of movable and immovable property.

Borrowers other than large borrowers are less likely to get project-based loans easily before the project is set up and operational. In this way, a large part of the loan investment made only after the establishment and operation of the enterprise and business has been used in the financing of the investment in the enterprise and business, i.e. equity.

According to the latest data, the total credit of the banking sector has reached the GDP. It is estimated that the group of about 500 large borrowers/debtors consume more than two-thirds of the loans in the banking sector.

How many jobs have been created by the contribution of large lenders who use more than two-thirds of the banking sector’s financial resources? How much did those debtors’ products contribute to gross domestic product and revenue? What percentage of the loan that has been flowed has been utilized? How much has been achieved through the contribution of borrowers who have been granted interest subsidies, concessions and discounts? Most of the private sector does not have integrated and reliable data.

The state has to take the responsibility of revitalizing the economy, improving the economic condition of the common people, reducing poverty, providing COVID aid, and bearing other expenses during economic recession.

But there is a surprising situation in Nepal where the demands to be placed with the state can be made with banks and financial institutions. This means, there is a need to find out where the presence of the state is. Loans provided by reducing the interest on the savings of a common citizen go to non-productive areas, are used for consumption, and are not used properly.

Limits and restrictions have been placed on investment in fund management organizations that collect the savings and funds of employees and retirees or insurance companies that collect the savings of the insured. In this way, by making a policy to keep savings in the bank without any choice, the system of reducing interest on institutional savings/deposits is also unfair for those employees.

A typical worker can save 33 years of income, i.e. national income per capita, to barely afford a house in a city in Nepal. Moreover, if the interest paid on savings is at or below the rate of inflation, it will take many more years to build a house.

In the name of the market, the interest rate of deposits of most of the savers is determined by the meeting of the umbrella organization of banks and financial institutions. Borrowers who take loans in the form of loans on the condition of repaying the money of the savers with customary interest are under pressure due to the increased interest rates and the current economic situation.

Competing with foreign products with the burden of increased interest rates is a more challenging situation for borrowers. It can be debated whether the debtor who accepts the prevailing interest rate without taking a fixed rate loan in the lure of cheap interest is more guilty or the one who gives such a loan is guilty.

The constitution has also given the government the right to collect taxes, raise loans and create funds only by making laws. It is ironic that the state has become a silent spectator while protesting and intervening on the streets and demanding waiver of microfinance loans taken from banks and financial institutions. It is not difficult to understand that in the anti-microfinance movement instigated by unrelated people with political objectives, the victims of microfinance are less and the abusers of microfinance are more.

The unabated direct and indirect activities that undermine the credibility of the banking and co-operative sector suggest that the economy is headed for a crash. If the private sector is going to start regulating the other private sector from the road, then it is important to be aware that if the economy goes haywire, the state may go to another conflict.

Borrowers should negotiate with banks and financial institutions to resolve problems related to loans. There is no need to say who owns the property purchased or the business established using the money of the saver.

Even now, there is no regular interest on savings that is higher than inflation. When the economy and liquidity are easy, the interest on savings is not even half of inflation. This means that they too should not have to go to the streets to raise their voice for justice.

When the interest rate of loans was very low, the loan expanded more and the utilization decreased and the quality of the loans gradually deteriorated. This situation has started since the transition period of COVID-19.

But now the main topic of debate is who will bear the interest rate risk among banks, borrowers and savers. The private sector, which has the main objective of overall economic prosperity and profit, does not raise the issue for its own direct benefit only on the basis of taking a loan from the bank, but only if it can explain the basis of contribution such as employment, tax, export, utilization of the loan, there will be justice towards the common savers.

As a whole, Nepali economy and banking sector need new thinking and a new and effective vision that can think above the current traditional thinking. Long after the election in the country, a new government has been formed and a new finance minister has come.The presented references show that the government’s economic policies are conflicting with each other so far, it is necessary for the Ministry of Finance of the Government of Nepal and the regulatory bodies to pay attention to the banking sector in order to make an economic policy involving the participation of the common people.

It is necessary for everyone to join hands towards making the economic policy that can solve all the current problems and the research that can solve all the current problems to revive and save the economy before it goes down from the deal.

Paudel Jeevan Bimak Sangh is the President and CEO of Citizen Life Insurance Company. (The presented article has been taken from Kantipur dated 24th of Chaitra 2079 and has been edited in such a way that the expression does not die.-Ed.).