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| Kathmandu, Tuesday June 10, 2003 Jestha 27, 2060. |
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NRB’s effort to reform
commercial banks
By SANTOSH PANDEY
It has been more than one year since Nepal
Rastra Bank (NRB) came up with new directives pertaining to various aspects of commercial
banks. The prominent changes were brought about in capital adequacy, single borrower limit
and loan classification and provisioning. The impacts of the changes have been seen in the
latest annual reports of the commercial banks. To name a few, there has been a surge in
the share capital and loan loss provision amounts. These changes may have affected the
bottom-line of the banks in the short run, but in the long run they will help the banks.
For instance, change in the capital adequacy from 8 percentage points to 9 percentage
points will ensure that the banks have a strong capital base before they make high-risk
loan disbursements.
One of the main objectives of a commercial bank
is to safeguard the money of depositors. With the low capital adequacy rate, the banks
were previously lending from the money of the depositors because the capital comprised a
very small portion of the total risk-weighted assets. However, the returns the
shareholders or promoters were reaping were quite high. The risk of the depositors was too
high. Similarly, the loan loss provisions being made by the banks before the
implementation of the new directives were too low. The reclassification of the loans to be
made by the commercial banks has, on the one hand, lowered the period for non-repayment
and, on the other, increased provisioning rates. Both these actions have beefed up the
commercial banks. Similarly, change in the single borrower limit has prompted the
commercial banks to increase their capital base so that they can retain good big clients.
Similarly, it is reported that NRB is coming up
with the Merger and Acquisition Act for commercial banks in the foreseeable future. The
enactment of such an act would certainly produce positive results because two weak banks
would then be able to merge and move forward vigorously or a strong bank could then be
able to acquire a weak or loss-making bank, which would certainly guarantee depositors’
money.
However, the perception of the common people and
even bank officials is not very positive towards merger and acquisition. They carry the
traditional thought that only weak banks do merge and are acquired. But it is not so.
Sometimes, two strong banks may come together and become even stronger. Merger and
acquisition are, however, frequent events on the international front. These are often used
as effective tools for strengthening the financial condition of banks. In the national
context, it may be mentioned that at a time when the number of banks seems to be high,
investment opportunities are low due to slackness in the economy, and cutthroat
competition is the order of the day, merger and acquisition may prove to be an effective
means of restoring the health of the banks.
Since the cease-fire between the government and
Maoist insurgents, the banking sector has been showing signs of recovery. Although lending
is gradually picking up, it will take time for lending to be restored. The seven months’
report of NRB has also shown that the total internal credit of the banks increased by 7
percent as against 3.3 percent during the corresponding period last year. The situation of
recovery will, however, depend on the success of the peace talks.
Medium-class and upper medium-class people have
not really benefited from the services offered by the joint-venture banks. Further, these
banks are reluctant to branch out to rural areas for fear of losing money. Therefore, it
is imperative that physical infrastructures be developed in rural areas so that banking
services can be rendered to rural folk. This will relieve the rural folk of the clutches
of moneylenders. More importantly, provision for banking services will act as a catalyst
in rural economic development, which will, in turn, contribute greatly to uplifting the
living standard of rural people along with the overall Gross Domestic Product.
Banks are alleged to fix interest rates by
cartelling. Healthy competition should have increased deposit rates and lowered credit
rates. Now, both rates are falling. The average credit rate is 12 percent, the fixed
deposit rate 5 percent and the savings deposit rate 3-3.5 percent. One of the reasons for
low deposit rates could be low credit flows and high deposits. Despite low interest rates,
deposits are always rising. This indicates lack of investment opportunities in the market.
Nowadays, the banks are really going through a
bad patch. With a decline in development project and construction activities, they are
finding it heavy going to make lucrative investments. Hotels, airlines, carpet, garment,
pashmina, handicraft industries and the like have still to come out of the effects of a
slump in the economy. Investments made in such sectors are hard to realise. In fact, this
is a sign of the ailing economy. And, its impact on the banks has been visible. Some banks
have, therefore, explored new avenues of consumer financing such as education, vehicle and
house loans. Banks have also been engaged in wooing remittances from Gulf and other
countries. The main purpose behind this initiative is to channelize remittances through a
banking network. In fact, inward remittances have been the mainstay of our economy in the
last few years.
Such being the case, the monetary policy of NRB
needs to be flexible. It is a matter of gratification that NRB has been contemplating a
more flexible policy. After all, the banks have the lion’s share of the financial
sector of the country. A good banking system is, therefore, a sine qua non for maintaining
financial equilibrium in the country. And, NRB’s efforts in this direction are really
praiseworthy.
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