Banks and Bulls rampage 2007

The year 2007 saw an increase in the number of financial institutions in Nepal. Three new commercial banks started their operations this year making it to a total of 23, apart from around 100 finance companies and more than three dozen development banks. Nepal Rastra Bank's (NRB) directive is blamed for causing the flood. The financial institutions that have already registered must have to get operating licence within Ashwin this year or they could have been treated like new ones and would have to increase their paid up capital.
In the liberal market policy the central bank also could not restrict any financial institutions from operating unless they break the rule. So, it increased the authorised capital, for commercial banks to Rs 2 billion and for development banks to Rs 640 million and for finance companies to Rs 30 million.
But with increasing number of these institutions, the central bank has to increase its supervisory capacity also, which has become a major challenge for itself lately.
However, still only the 20 per cent has access to banking services, according to the NRB data. The banks have recently been penetrating the semi-urban areas. Some of them have even brought innovative banking and non-banking services and instruments to expand their market.
One of the major reasons of flooding the finance institutions is the flow of remittances that has increased by 21.4 per cent to Rs 9.36 billion in Q1 of 2007-08 compared to a growth of 29.9 per cent last year. Meanwhile some bankers are afraid of non-banking professionals' dominance in this field making the whole sector vulnerable.
The increase in number of financial institutions set fire in Nepali capital market this year as Nepse crossed the historic high of 1064-point mark in December. Last year, the Nepse was hovering around 500-point mark.
Securities Board of Nepal (SEBON) has approved more that Rs 2.48 billion worth rights and ordinary shares issue of 17 companies — about 95 per cent of which are finance institutions — within the first five months of this fiscal year till December, whereas it had approved Rs 2.75 billion worth issuance of 31 companies during the whole year in 2006-07.
Similarly, within this first five months, the market capitalisation has also increased to more than three trillion rupees from last year's Rs 1.8 trillion. The total market capitalisation has reached to 27.78 per cent of GDP.
Capital market is considered a barometer of national economy. But in Nepal's context, it does not reflect the real economic growth as it is largely dependent on financial institutions only. Lately the Insurance, Hydropower and Hotels group is also picking up by the involvement of real sector is still far.
However, this year Nepse has automated the capital market, started providing real time information and WAN services.
The absence of real sector, effective monitoring of SEBON, the regulatory body of the capital market and lack of transparency in the listed companies — that stands at 142 at present — inside trading and manipulation have also been suspected in the secondary market, which is not a good sign.
Meanwhile, by the end of December, the market has started corrections, which is not bad.
SEBON is bringing some more regulations to modernise capital market for its transparency and involvement of institutional investors like mutual fund and CDS that will help control market volatility which could make Nepali capital market the real barometer of national economy.