By Sajag Karki
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The Banking sector of Nepal is facing its ultimate test amidst political instability, liquidity crisis, unfavourable policies of the regulating body, sluggish economy and various other macro and micro economic factors. The ripple effect of global financial crisis of 2007-2008 has hit the Nepali banking sector as well. By strengthening the regulatory/supervisory system and improving the implementation of new standards on quality and quantity of capital and liquidity and risk management, opportunities can be created for the banking sector such as branch outreach to rural areas, developing hydro power and tourism etc. Though there are a lot of challenges in the banking sector, many opportunities still exist which are yet to be exploited to their potential for the benefit of the Nepalis.
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Improving the worsening liquidity crisis that is directly affecting the operation of banks is the major challenge for the banking sector in the current scenario. Higher loan investment made by banks compared to the deposit they have mobilised and the regulatory provision that requires declaration of the source of the fund for a deposits exceeding Rs 1 million, contributed to the liquidity crisis. This is the major issue that all the banks should address as an industry. They are currently outbidding each other to increase their deposits out of the same money that is in the system. In this process they are creating unhealthy competition and further aggravating the problem. There is a strong need for all banks and financial institutions (BFIs) to unite and convey a positive message to potential depositors to win back their trust in the banking sector.
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Due to the liquidity crunch, inter-bank short-term interest rate has crossed 12 percent. The continuous injection of liquidity by Nepal Rastra Bank (NRB) through repo sale over the last two months suggests a continuing liquidity crunch.
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Also the existing level of Non-Performing Assets (NPA) is not a good sign for smooth growth of the banking sector. The time has come to properly implement a prudent strategy for reducing NPAs. The liquidity crisis has resulted in declining private sector credit, while growth in the private sector credit is essential to create economic activities. The balance of payment (BoP) deficit which has reached Rs 16 billion in the first seven months of the current fiscal year further aggravated the liquidity problem.
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However, the banking sector is riddled with several other challenges. There is tough competition with 31 commercial banks and innumerable development banks and finance companies wanting a largeer piece from the same pie. Fresh funds have not been generated hence retaining depositors’ money remains a challenge. Despite a large number of BFIs, banking facilities hasn’t reached 70 percent of the population.
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Another challenge is strengthening overall financial stability in general and the banking sector in particular. Frequent changes and ad-hoc policies due to lack of prudent thinking of the regulating body has created uncertainty in the banking sector and has resulted in weakening banking sector reform (BSR). Some of NRB’s recent regulations seem to have favoured control regime. Hence, the BSR and liberalisation policy have become directionless. Also, the weak supervisory capacity of NRB may hide the real situation of the banks. Reducing real estate exposure and increasing productive sector credit will create more economic activities in the economy. But these still remain a challenge. Keeping in view the situation of too many banks in a small economy of Rs 1200 billion GDP and weak auditing system, strengthening of banking sector by encouraging mergers and acquisitions (M&A) and adopting international audit and disclosure system is a major challenge. Improving good governance and transparency need to be looked at too.
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Lending by banks has also been affected because of problems faced by businesses such as long load-shedding hours and labour unrest. Further, an unexpected decline in remittance which is equivalent to nearly a quarter of the country’s GDP, added severe challenge to the already bleeding economy. The GDP growth at 3.5 per cent is sluggish, to say the least. Political instability and interference has also been a bottleneck in the development of the financial sector. It is now certain that the constitution is not going to be ready also by the May 28 deadline. For some years, it has become a certainty that the government budget will not be announced and approved on time. This too has affected the investment climate and thereby the banking sector.
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Nepal’s banking sector flourished over the years despite numerous challenges and is trying to be at par with international standards. At the same time, it also has various opportunities that can be explored. By becoming a member of the WTO, Nepal have opned its market for foreign banks to set up their branch here beginning 2010. With this provision, foreign banks might enter the Nepali market in the near future and this will help improving foreign investment and technology in the banking sector.
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There are ample opportunities for the banking sector to explore the rural markets in Nepal via innovative products such as microfinance, mobile banking etc. Nepal is an agro-based economy with nearly 84 percent of the population in the rural areas. The BFIs need to develop ingenious products and adopt new technologies to cater to the rural sector. By reaching remote locations, BFIs could contribute towards poverty alleviation as well. If the banking sector could expand its services there, more jobs would be created which will result in further prosperity of the overall economy. Proper availability of remittance services via banking channels all over Nepal, especially to the remote areas, can prove to be crucial. Since remittance is one of the mainstays of our economy, it must be given special consideration. The banking sector also realises the potential of small and medium sized enterprises (SMEs) in the rural sector. The tourism and hydropower sectors too provide opportunities for the banking sector to lend. Public-private partnership (PPP) concept will be equally desirable for poverty alleviation, growth and expansion of banking services, especially in the rural economy.
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Hence, the banking sector in Nepal is bound to go through testing times with challenges and opportunities galore. A long-term clear cut strategy by the regulating body and a strong commitment from the banking sector is required for the holistic development and growth of this sector. The banking sector can bring about tremendous improvement in the coming days by giving special preference to the rural along with the urban sector.
(Karki is currently associated with
KIST Bank.)
KIST Bank.)
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