The experts blame haphazard distribution of licence for the mushrooming of incompetent financial institutions in the country.
“The licence for finance companies were awarded based on paid up capital alone without any consideration for the capability of licence seekers — to run a financial institutions — and their background," said immediate past president of Nepal Financial Institutions Association (NFIA) Ram Shanta Shrestha, in an interaction programme organised here by the association today.
"The government grew wary that no finance companies had started business despite the encouragement and it started doling out licence since early 1990s," he added.
Shrestha also blamed directors and promoters, who has no knowledge of banking and corporate governance for the current volatile state of the finance companies.
Similarly, the association's president Rajendra Man Shakya also attributed the large number of financial institutions in a small size market for current situation.
There are 219 financial institutions, according to the central bank, competing in the market that has created distortions in the financial market including 31 commercial banks, 87 development banks, 79 finance companies, 21 micro-credit development banks, 16 NRB-licenced Saving & Credit Cooperatives and 38 NRB-licenced-NGOs.
On one hand the number of banks and financial institutions have been increasing, and on the other access to finance has not made any significant progress across the country. A visiting International Monetary Fund (IMF) team has also suggested the central bank that the country is overcrowded with banks and financial institutions. It has suggested to reduce the number of banks and finance companies to the half — from the current 219 — encouraging mergers.
"Though merger has been forwarded as the solution by the central bank, it has yet to be tested either merger can transform two weak financial institutions into a stronger one overnight," Shakya said, adding that the egos among the board of directors have been posing a big hurdle in the merger process.
Recently, four finance companies ran into trouble denting the public image of the class 'C' financial institutions as untrustworthy. Samjhana Finance that is in liquidation process and other three — Nepal Share Markets and Finance, Capital Merchant Banking and Peoples Finance — got themselves into trouble solely due to misappropriation of funds by their chairmen.
The companies themselves were not in bad financial shape but the bad corporate governance in the institutions damaged them.
"The directors push the management for higher profit and dividend even violating corporate governance code," he said, adding that the directors, who come from various backgrounds, need to be educated to maintain good corporate governance that has reinstate public trust in finance companies that are struggling to deal with present liquidity crunch amid the shrinking deposit due lack of public trust.
The over dependence on institutional depositors has also created most of the liquidity troubles for finance companies. "When such institutional depositors withdraw deposits, finance companies find themselves in deep liquidity problem," he said, adding that the finance companies need to focus more on retail depositors now on.