Setoral

The actual financial indicators for fourth quarter of FY 2057/58 of various commercial banks have already appeared in daily newspapers. The figures show that all the private sector banks have been successful in increasing their deposit and credit portfolio remarkably over the last one year. The figures also show that most of these banks have been cautious about loans and advances. The operating profit of all the private sector commercial banks have gone up, so has the provision for loan loss. In short, the banking sector in Nepal is somehow doing well even though it has to face a number of hurdles during the past few years.

At present, altogether 16 commercial banks including 3 public sector banks are operating in Nepal. The condition of two oldest public sector banks is very bad at the moment. But the third public sector development bank (ADB/N), which is also operating a commercial banking wing, is still doing well despite political and bureaucratic interference and internal problems. The remaining 13 private sector banks are all in a profitable position even when there is neck in neck competition among them. Some development banks and well-managed finance companies are also competing with these banks. Recently Nepal Rastra Bank has issued license for the opening of three more banks. Th is way the number of banks is increasing but the volume of business has remained the same.The three public sector commercial banks do not publish their financials in newspapers so it takes time to get the information from NRB. Since they are manifolds bigger than the private sector banks, it is not relevant to compare them with joint venture and private sector banks. The private sector commercial banks of Nepal can be categorized into three major categories in terms of their deposit, loans and advances, profit, management capability, credibility and international exposure. The three categories can be as follows:a. Large and Established banks: Standard Chartered Bank Nepal Ltd., NABIL Bank Ltd., and Himalayan Bank Ltd.b. Medium Level Banks: Nepal Bangladesh Bank Ltd., Bank of Kathmandu Ltd., Everest Bank Ltd., Nepal Indosuez Bank Ltd., and Nepal SBI Bank Ltd.c. Small and New Banks: Nepal Bank of Ceylon Ltd., Lumbini Bank Ltd., Nepal Industrial and Commercial Bank Ltd., Machhapuchhre Bank Ltd., and Kumari Bank Ltd.The three large and established banks have been occupying the biggest share of deposit and loans/advances among all the private commercial banks. Their share in deposit and loans/advances is almost 50 percent, of which the former accounts for almost Rs. 50.5 billion and the latter Rs. 40.9 billion. These three banks ane have earned a gross profit of about Rs. 2.2 billion in FY 2057/58. All these three banks have also been included in the list of largest 500 banks in the Asia-Pacific region recently published by Asiaweek.

The progress of the five medium level banks is also satisfactory. Bank of Kathmandu, which was almost on the verge of collapse few years back, has dramatically improved its position and reputation in the market. Nepal Indosuez, which had stayed in a low-key profile for some years, has increased its deposit, loans and profit. The performance of Everest and SBI is also improving. Among the five medium level banks, Nepal Bangladesh Bank is emerging as a tough competitor of the large and established banks. For the last few years, it has achieved tremendous progress in terms of deposit, lending, fee-based income, branching out, and profit. It is very difficult to measure the progress of banks, as the good loans and advances can at any time become bad ones, and it is even vulnerable when banks are lending aggressively during the initial period. The result of these lending comes only after few years.

The five small and new banks have also done well during the last financial year. Nepal SBI Bank, Everest Bank and Nepal Bank of Ceylon have improved their position. New banks such as Lumbini, NIC, and Machhapuchhre have opened a number of branches in a short span of time and have been able to earn good profit. Their deposit and lending base is also going up gradually. Kumari Bank has yet to come into the big picture since it has just started its banking activity.

Due to political and other reasons, Nepal’s economy has been badly affected since the past few months. The GDP growth, which surged from 4 to 6 percent last year, is anticipated to go down to 5 percent this year. The preliminary statistics show that the export of garments and carpets will also fall by almost 30 percent this year. Another core sector, i.e. tourism, is being hit by frequent bandhs, violence, political instability, recent terrorist acts in the USA and many other factors. Entrepreneurs have been discouraged to establish new facilities due to Maoist threats and labor problems. This situation will definitely affect the banking sector as well. In situation where volume of business is not increasing, but rather decreasing, and financial institutions are mushrooming, there will be a tremendous pressure on the financial institutions for survival. In developed countries, companies merge with each other before being caught by recession, but in Nepal the concept of merger is still very new. Recently three airline companies of Nepal have agreed for business alliance. This was a very wise step of the management of the three airlines. After sometime, the banks of Nepal should also start making alliance with each other. They can have alliance in expensive technologies such as ATMs, credit cards, communication devices, software, and other business activities such as combined branches, consortium lending, attracting remittances and other fee based income, etc. If the alliance works, then the door for merger also opens.

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Performance-Based Category of

Banks and Possibility of Alliance