NATIONAL8 (Spotlight Weekly]

Reforming Banks And Financial Institutions

By RAJENDRA K. KHETAN

There has been a significant rise in the number of banks and financial institutions in Nepal thanks to the process of economic liberalization that started a decade ago. The financial position of banks and financial institutions appears to be positive. Even then, other industries and businesses seem to be declining. Such a situation is certainly not good for the national economy when judged from the national perspective. Today's economy reflects tomorrow's condition of the banking and financial sectors. In Nepal, industrialists and businessmen are failing to make investments due to lack of resources. On the other hand, there is an excess of liquidity in the market, and banks are failing to make investments. Reducing and removing this imbalance are a major challenge.

Due to excessive liquidity, the banks have been considerably reducing their deposit interest rates over the past two or three years. However, there has been no corresponding reduction in the rates of interest to be paid by industrialists and businessmen on loans. As a result, the process of saving remains discouraged, while investments in productive fields are failing to increase to the expected level.

While talking about banks and financial institutions, it must be said that we remain deprived of the opportunity of using various financial instruments. Bank loans are based not on projects but on collateral. Besides, bank loans are based on the concerned bank's view about the firm/company's proprietor/director. In a country where a liberal market-oriented economy is said to be in force, it is certainly unfortunate that the supply of loans is based not on the merits or demerits of the concerned project or scheme but on the concerned individual's credibility. We have also not yet been able to gain expertise in banking transactions other than loans. Even now, it takes two to three days to transfer money from one bank to another within the same city. Collections to be made from within the country also take weeks. Even in the present-day age of information technology, many transactions have to be carried out in cash. Most of the times, cheques bounce. As a result, businessmen hesitate to conduct transactions through cheques.

It is being reported that in the financial sector, the private sector banks are earning much profit, while our big and old banks are facing a critical situation. These big and old banks have spread their branches to various parts of the country, and are providing services to small and medium customers. We have felt that the deteriorating conditions of these banks are obstructing the process of expanding the banking services to small towns for the past several years. There has been no noteworthy improvement in the situation even when the issue of the deteriorating condition of these banks is being discussed.

It has been admitted by almost everybody that our financial sector lacks appropriate regulations. Even though the Nepal Rastra Bank says that its functions of monitoring, evaluating, scrutinizing and controlling banks will be discharged more effectively, the various scandals occurring from time to time and the critical condition of the old banks make it clear that this is not happening.

Several of the laws regulating this sector have become quite old. It is clear that they are failing to reflect the present-day needs and fundamental reforms and changes are needed. We believe that the private sector should also be consulted while framing legislation. Regrettably, we could not participate in the process of framing new laws and amending old ones initiated by the Nepal Rastra Bank.

Monetary policy is not announced periodically in Nepal even now. If that policy is to be finalized at specific times and for specific periods, we businessmen will be free from uncertainties. We believe that such a process should be started soon. Our Foreign Exchange Act remains unchanged although many changes have been introduced in our foreign exchange policy. As a result, questions are being asked about the types of transactions that are to be considered legal or illegal. Timely reforms should, therefore, be introduced. It is also time to ponder seriously over the type of homework needed to provide full convertibility to the Nepali currency.

Banks need to recover loans supplied by them. Likewise, enterprises, which cannot be re-operated, need to be closed down. However, an opportunity should be provided to all such enterprises as can regain good health through efforts for revival. Nepali entrepreneurs are still relying on loans supplied by their savings banks or on loans available in the market. The process of supplying capital through merchant banks, venture funds, stock markets, mutual funds and insurance companies like in the developed countries has not yet developed here. We, therefore, believe that the Nepal Rastra Bank has to take initiatives for the development of this sector.

Several commercial banks are confining themselves to the urban areas citing reasons of possible losses and insecurity in the rural areas. As a result, entrepreneurs in the rural areas are facing difficulties in conducting banking transactions. Since the issue has been raised by several district and town level chambers of commerce and industry, the Nepal Rastra Banks needs to pay attention to this.

The Nepal Industrial Development Corporation and the Agriculture Development Bank are two institutions playing an important role in the flow of credit. However, there has been no expected level of reforms in their working styles. It is necessary to modernize these institutions. The Nepal Rastra Bank needs to take initiatives soon to take ahead the already delayed process of effecting reforms in the two big banks of the country. The budget has mentioned that the Nepal Rastra Bank will reinvest in sick industries. The entire mechanism thereof should be made public.

A bill relating to realization of bank loans has recently been tabled at the current session of parliament. The provisions relating to penalties contained in that bill provide for detention and arrests. We believe that no situation necessitating such provisions has yet emerged, and that such provisions will be impractical. For the past few days, depositors are reported to have withdrawn considerable amounts from their accounts. If this trend continues, this will have a negative impact on the entire economy. Accordingly, whatever is to be done in this connection has to be done in time. A consortium of new and industrial banks should be established. The Nepal Rastra Bank should take initiatives to provide techno-financial support to the private sector. There is a need for taking the private sector into confidence while signing agreements and understandings between institutions such as the World Bank, Asian Development Bank and the International Monetary Fund and the government, the Ministry of Finance, the National Planning Commission and the Nepal Rastra Bank.

(The article is based on a presentation by the author at a meeting at NRB late last month. Mr. Khetan is second vice president at the Federation of Nepalese Chambers of Commerce and Industry.)