Banks spread wings to rural Nepal

To push up their deposits, urban-centric financial institutions — especially commercial banks and development banks — have started moving into rural areas where there is a vast untapped market.
In the fiscal year 2007-08, commercial banks added 81 new branches making it a total of 663 branches from Pashupatinagar in the east to Mahendranagar in the west. "However, only around 20 per cent of the total population has access to the banking system," said Nara Bahadur Thapa, director at the Research Department of Nepal Rastra Bank (NRB).
Within the fiscal year 2007-08, four new commercial banks: Sunrise Bank, Global Bank, Bank of Asia Nepal and Citizens' International Bank entered the market. NMB Bank upgraded itself to a commercial bank from a finance company and Development Credit Bank upgraded itself to a commercial bank from a development bank, thus making it a total of 25 commercial banks. Five more commercial banks are in the pipeline.
A total of 30 new financial institutions were established in the fiscal year 2007-08. These include five commercial banks, 20 development banks, four finance companies and one micro-finance institution. Currently, there are 58 development banks, 78 finance companies and myriad cooperatives.
"The size of the economy has not grown and number of players is increasing. This may encourage unhealthy competition," said Jyoti Pandey, general manager of Nepal Investment Bank Ltd.
Sujit Mundul, CEO of Standard Chartered Bank Nepal, concurred, "The increase in number does not guarantee quality of service. It is high time the government encouraged mergers." Pandey added, "We need few but efficient and strong banks, not too many banks that are weak," Pandey added. Because of the large number, regular inspection, supervision and monitoring may not be effective. With the growing number of financial institutions, the role and responsibility of Nepal Rastra Bank (NRB) has also increased.
With Basel II in implementation from this fiscal year, financial institutions are going to be more transparent, said NRB, the central bank. Despite the increasing number of financial institutions and decreasing size of the market pie, political instability, frequent bandhs and a slowdown in the economy, most financial institutions posted an increase in their net profits in the fiscal year 2007-08.
However, more than 90 per cent of their income accrued from interest. "This trend cannot last long," Radhesh Pant, president of Nepal Bankers' Association and managing director of Bank of Kathmandu (BoK) said, adding that the banks will have to start specializing in one sector or another. On one hand, the bankers complain that the number is increasing and margin is decreasing but on the other, commercial banks' deposits have also been increasing. "The deposits of commercial banks' have increased by Rs 87.07 billion (26 per cent) to Rs 421.52 billion in the fiscal year 2007-08," said the central bank's report.
Of the total deposits, saving and time deposits increased by Rs 36.77 billion (21.1 per cent) and Rs 38.33 billion (33.6 per cent) respectively. The reason: Establishment of five new commercial banks, expansion of branch network by existing banks and higher remittance inflows that increased people's accessibility to the financial sector.
Credit to the private sector also grew by Rs 71.42 billion (26.9 per cent) during 2007-08. Commercial banks, in addition to deposits mobilisation, funded their increased loans and advances through an additional capital mobilisation of Rs 11.73 billion. The credit-deposit ratio increased marginally to 82.6 per cent in mid-July 2008 from 82.1 per cent a year ago, the central bank's yearly report said.
In the fiscal year 2007-08, the liquid assets of commercial banks increased by 15.5 per cent to Rs 151.11 billion compared to a growth of 8.4 per cent the previous year. Of the total liquid assets, liquid fund of commercial banks grew by 21.7 per cent (Rs 14.08 billion) to Rs 79 billion in the review year compared to an increase of 5.2 per cent the previous year. In the fiscal year 2007-08, commercial banks had deposit of Rs 23.86 billion with NRB, which accounted for 6.2 per cent of their total domestic deposits. The balance held abroad by commercial banks increased by 21.1 per cent to Rs 41.1 billion. The credit trend has also been buoyant as real estate, production, residential and non-residential construction, wholesale and retail trades are now borrowing money for business.
Bank credit to food processing industries increased by Rs 2.48 billion and to iron and steel production sector by Rs 2.68 billion. Likewise, credit to the construction sector and real estate increased by Rs 12.59 billion and Rs 8.25 billion. Credit to real estate had increased by Rs 1.08 billion in the previous year. Other credit including the credit against share and trust receipt have also increased by Rs 17.51 billion compared to Rs 6.58 billion a year ago.
Besides the establishments of new banks, old ones also are in expansion mode. Banks like Nepal Investment Bank and BoK are in aggressive expansion mode. "We are definitely expanding," Pandey said adding that in the long run only the banks with large clientele base would survive. For the moment, banks might feel the pinch but in the long run they will have to go to the rural masses to get output.

Number of Banks and Financial Institutions Fiscal yearCommercial Banks 20 (2006-07) -- 25 (2007-08)
Development Banks 38 (2006-07) -- 58 (2007-08)
Finance Companies 74 (2006-07) -- 78 (2007-08)
Micro Finance Institutions 12 (2006-07) -- 12 (2007-08)
NRB Licensed Co-ops (limited banking transactions) 17 (2006-07) -- 16 (2007-08)
NRB Licensed NGOs (micro finance transactions) 47 (2006-07) -- 46 (2007-08)


Monetary policy soonNepal Rastra Bank is bringing monetary policy and bankers are keenly watching how the regulatory authority of the finance market will crack the whip on inflation and at the same time encourage financial intermediaries. Monetary policy has to encompass the whole macro-economic situation but it at the same time, cannot put the burden on financial institutions. Monetary policy should encourage budget and encourage financial institutions to reach out to the people in various possible ways.However, the burning issue right now is will Nepal Rastra Bank reduce Capital Adequacy Ratio (CAR) and increase Cash Reserve Ratio (CRR). CAR is expected to come down to nine per cent or 9.5 per cent from the current 10 per cent.Internationally, Basel II has recommended CAR at eight per cent. "A limit of nine per cent is also okay," said NBA president Radhesh Pant. "NRB has directed banks to maintain CAR at 10 per cent," Pant said. "However, monetary policy not only looks after the financial sector, it also has to look at the micro economic situation and where the country is headed to. In totality, the key drivers should be identified."

Capital marketThe capital market is dominated by financial institutions. Around 90 per cent of the trading at Nepal Stock Exchange, the sole secondary market, is of shares of financial institutions, commercial banks, development banks and finance companies. The stringent rules of the central bank and the disclosure system has not only created transparency in the financial market, it has helped push the capital market. The Nepse index rallies if the banking index goes up and vice-versa.