Banking Sector In Nepal
Problems & Prospects

By Uttam Maharjan

THE banking sector forms the sinews of the financial system of any country. Other sectors of the financial system are finance companies, cooperatives and, of course, informal financial systems. It would be relevant to note that 75 per cent of the credit in rural areas is met through the informal system while 25 per cent through financial institutions.

Importance

The importance of the banking sector in the present-day world can hardly be overemphasised. A sound banking system leads to savings, investments and hence economic growth.

The banking business in Nepal began with the establishment of Nepal Bank Limited in 1994 B.S. The bank was established at a time when the financial sector had been dominated by moneylenders throughout the country. Such moneylenders used to give loans to the people at a usurious rate of interest.

Nepal Bank Limited used to carry out central banking functions also besides commercial banking functions until the establishment of Nepal Rastra Bank in 2013 B.S. Realising that Nepal Bank Limited alone was not able to extend adequate services to the country in terms of commercial banking, another commercial bank called Rastriya Banijya Bank was set up in 2022 B.S. In 2024 B.S., Agriculture Development Bank was established with the objective of promoting the agricultural base in the country and the Cooperative Bank, which was set up in 2020 B.S., was merged with it due to a similar nature of their functions.

During the 2040s, the banking sector was virtually revolutionised by the emergence of joint-venture banks. With the advent of the joint-venture banks, the banking scenario in the country has undergone a sea change. The joint-venture banks have adopted new, aggressive marketing strategies to offer their clients personalised and customised services and introduced new service packages, such as credit cards and automated telling machines (ATMs). Himalayan Bank is even operating the premium savings account (PSA) scheme with attractive prizes and special facilities.

Actually speaking, the joint-venture banks are falling over themselves to attract as large clientele as possible, especially big clients. Driven by the profit motive, such banks prefer to extend their networks to urban centres rather than to rural ones. The reason for urban concentration is all the more obvious.

On the other hand, government-owned banks, Nepal Bank Limited and Rastriya Banijya Bank, are heavily concentrated in rural areas. Statistics reveal that commercial banks have 475 branches in all- 153 in urban areas and 322 in rural areas. And, 95 per cent of the rural branches belong to the government-owned banks.

The government-owned banks cover 85 per cent of the total banking transactions, with 15 per cent going to other banks. Similarly, they have more than 55 per cent of the total deposits and loans, which stand at about Rs. 145 billion and Rs. 91 billion respectively.

Although these colossal banks are contributing to the overall economy of the country, a furore was kicked off in the banking sector in the wake of KPMG Barnet, an international audit firm, making public its report on the banks. As per the report, the banks have huge outstanding loans, some of which are overdue, and others non-performing.

The report identified poor and inefficient management, political interference and lack of rational banking strategies as major causes of the banks’ plight. Other ills identified were a weak financial reporting system, a weak management information and accounting system, weak human resource management, primitive planning, disrupting unionism, poor loan appraisal and lending practices, unsatisfactory loan recovery procedures and overstaffing. Moreover, heavy amounts of unused assets, corruption and heavy expenses were also blamed for the mounting problems of the banks.

It is not that no financial reform has been embarked upon by the government. It would be quite worth mentioning that the Nepali Congress initiated the Financial Reform some eleven years ago with the objective of fine-tuning and ameliorating the financial sector. Financial institutions, including banks, could play an active role in making the programme a success. But it is ungratifying to note that nothing concrete seems to have come of the programme yet.

However, the government is serious about the plight of the state banks. That is why, Nepal Rastra Bank has invited global tenders from international consultants for the management of the banks so as to save them from the precipice of collapse. It may be hoped that with the management of the banks handed over to competent consultants, the banks will be better able to render efficient services to the public and contribute greatly to the economy of the country.

There is still another field the government should fix its attention on - the five regional rural development banks. A replica of Bangladesh rural banks, which are flourishing in a grand manner, the regional rural banks are being confronted with massive problems. All these banks, except the western rural development bank, are now running at a loss. The main motive behind the establishment of these banks is to accelerate rural development by mobilising rural folk in the banking sector and by relieving them of the clutches of the usurers. Therefore, the collapse of these banks would certainly defeat the sacroscanct objective of poverty alleviation in the rural areas.

Some foreign banks have their representative offices in the country, which act as coordinators as well as facilitator between their banks and the Nepalese banks. The current budget has provided for the establishment in the country of the branches of reputed foreign banks.

It may be hoped that such branches will introduce new banking methodology into the country. Rather than compete with the local banks, they will supplement the banking industry. So the government should create a conducive atmosphere so as to encourage reputed foreign banks to establish their branches in the country.

Similarly, the joint-venture banks are allowed by Nepal Rastra Bank to open their maiden branches in India. The capital requirement for the branches is USD 25 million spread over three branches - USD 10 million each for the first and the second branches and USD 5 million for the third one. The establishment of Nepalese branches in India could be a milestone in Nepal-India trade, but the huge capital requirement is a great constraint, indeed. Owing to the huge capital requirement, a single bank does not seem to be able to go it alone. Rather, two or more banks may collectively extend their networks to India in a consortium banking fashion. This could pave the way for promoting Nepalese banking networks transnationally.

Boost

To give a shot in the arm to the banking sector, international standards of loan classification and required provisions, liquidity and reserve requirements, capital adequacy, exposure limits, single borrower limits and so on should be strictly enforced. Besides, the government should be serious about attracting foreign investments to the country by creating an investment-friendly environment. And, monitoring of the activities of the financial players by the central bank is a must for bringing about economic stability.

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