National 3 (Spotlight Weekly)

The Governor Speaks

Dr. Tilak Rawal, head of the central bank, reveals that some private-sector banks are under close observation

By A CORRESPONDENT

Despite many positive reforms, the country's financial sector has been passing through a very critical phase. Some public and private banks are operating in the absence of adequate funds.

In the area of public-sector banking, the central bank has already handed over Nepal Bank Ltd (NBL) and Rastriya Banijya Bank (RBB) to management it believes is capable of carrying out much-needed reforms. The new managements have begun their operation to rescue the country's two oldest banks.

Dr. Rawal : Bold

Following dismal performance, the central bank is also awaiting the report of a committee looking in the position of the Nepal Industrial Development Corporation (NIDC) and the Agriculture Development Bank (ADB). "The overall performance of the NIDC is so bad. We may announce its liquidation," revealed Governor Dr. Tilak Rawal. "Like the NBL and RBB, the ADB and NIDC also need a reform package."

At a talk program on corporate governance and financial-sector reform, organized by the Society for International Development, Dr. Rawal frankly mentioned the challenges and prospect of the Nepalese financial sector.

With the liberalization of the financial sector in 1984, the sphere grew rapidly. There was a marked increase in competition. However, performance has been far from satisfactory.

"If they do not improve their overall performance, Nepal Rastra Bank will take over the management of 'some' other commercial banks," warned Dr. Rawal. The NPA of commercial banks shows a dismal picture standing at above 45 percent in case of the RBB and the NBL. Recent findings have shown that some private banks also have very high NPA. These new findings have prompted Nepal Rastra Bank to go ahead with greater in-depth supervision and remedial measures for the private sector banks also without wasting much time."

In his hour-long presentation, Dr. Rawal shed light on financial growth in Nepal. The establishment of the NBL in 1937 marked the beginning of banking sector in Nepal. The liberalization of the financial sector has increased the number of private banks.

"These banks have increased the capital funds, deposits and loans and advances granted over time. Despite the quantum jump in deposit, the growth rate of it has decelerated a bit of late (17.3 percent in 2002, 1.7 percent in 2002). So is the case with liquid fund. Notwithstanding this decline, prevailing law and order situation and the consequential slower growth of loans and advances have given rise to a situation of excess liquidity," said Dr. Rawal.

"Nepal Rastra Bank has taken some bold steps to improve the sector. In some cases, the NRB clearly has clearly indicated that it will intervene. In order to minimize risk associated with over-concentration to a single party, banks have been directed to provide credit to a total of 25 percent of core capital on fund based items and 50 percent of core capital on non-fund based items to a single borrower; establish code of conduct for governing boards of commercial banks and asking the management on financial matters and imposed restriction of credit to the board of directors and promoters shareholders having more than 1 percent stake in the equity and formulation and distribution of statutory forms based on International Accounting Standards to commercial banks to ensure transparency of financial information to the concerned parties," said Dr. Rawal.

At the program, chaired by Professor Bishwokeshar Maskey, president of society, Dr. Rawal presented the overall scenario of Nepalese banking sector. "The banking sector is complemented by other reform initiatives in the capital markets, legal and judicial improvement, and capacity building of necessary financial institutions," said Professor Maskey.

The realities Dr. Rawal recounted were harsh, but they are a vital part of the effort to set things right.