Central bank may bar business community from opening banks

The central bank is revising bank licencing policy that might discourage the loan-demanding sector to open banks.
"Should the loan-demnding sector be allowed to open banks or not, is a global debate not only in Nepal,” said Npal Rastra Bank (NRB) governor Dr Yubraj Khatiwada. "The central bank is also looking at the International and regional best practices while revisiting the bank licencing policy,” he added.
After Nepal adopted the liberal economic policies in early 1990s, banking is one of the sectors that has seen an exponential growth. However, most of the promoters of the domestic banks are business community -- the loan demanding sector themselves.
Currently, there are 80 Class-B development banks, 79 Class-C finance companies and 29 Class-A commercial banks in operation and two more – Century Commercial Bank and Civil Bank – is waiting for the operation licence from the central bank to start their operations making a total of 31 commercial banks, apart from some of the development banks that have applied for the up gradation to the Class-A commercial banks.
However, the central bank has temporarily halted the licencing for the commercial banks claiming that it needs revision on the banks licencing policy.
The Monetary Policy for the fiscal year 2010-11 has also speeled out the Merger and Acquition (M&A) proposition for the banks and financial institutions (BFIs) saying that the economy needs strong but few BFIs not more and weak ones.
A central bank source said that the NRB is correcting its policies according to the recent development in the financial sector. "NRB is not putting the curb on opening new banks but trying to revisit the current licencing policy to make the banking industry more competent,” the source said, adding that there will be conflict of interest, if the loan-demanding sector is allowed to open the banks.
The economists also claim that there is every possibility of 'insider lending' making the central bank monitoring difficult due to the rising number of BFIs. "On one hand the central bank has to improve its monitoring capacity and on the other, the creterion for the banks needs revisiting," the central bank source, said adding that the paid up capital alone cannot determine the strenght of a financial institution.
Until recently, paid up capital was one of the key pre-requisite for the BFIs establishment. "However, paid up capital alone cannot determine the strength of a financial institution," governor said.