Though, the Monetary Policy – released by the central bank – for the current fiscal year 2019-20 failed to spell out the big merger, the World Bank has recommended the government to further reduce the number of commercial banks to fewer than 15 from current 28, within three years.
“The balance sheet size of commercial banks needs to increase to enable them to offer sensible loan volumes to support the infrastructure sector,” reads the report ‘Nepal Infrastructure Sector Assessment’ released by the World Bank on Thursday coinciding with two-day-long ‘Nepal Infrastructure Summit-2019’. The summit was organised jointly by Confederation of Nepalese Industries (CNI) and Ministry of Physical Infrastructure and Transport.
Though the report assesses the energy, transport, and urban infrastructure sectors and highlights private sector solutions for sustainable infrastructure development, it has also recommended the government to further consolidate the banking sector to enable it to finance large-scale infrastructure projects in Nepal as a short-term priority action of up to three years.
The report also suggested that that lowering the number of commercial banks to less than 15 will help in developing the domestic banking sector’s capacity to finance infrastructure projects. The report also reads that reducing the number of commercial banks from current 28 to less than 15 will start to reshape the sector and provide banks with scale and efficiency to deliver consistent loan volumes. It has also concluded that Nepal’s domestic banks and financial services institutions are fragmented, subscale, and constrained in their capacity to finance.
“The domestic banking sector can also help in meeting the finance gap in the infrastructure sector,” the report reads, adding that it requires consolidation to enable more efficient deployment of capital. “Not only the mismatch in the asset and liability makes it difficult for banks to lend in long-term infrastructure projects, it has also been making interest rates volatile in the market.”
Due to an asset-liability maturity mismatch, banks have limited ability to lend in the long term, as evidenced by the 5-to-10-year average tenure of a term loan,” the report further reads, “Bank lending is further limited by high collateral, considerable sponsor support requirements, and a lack of experience and capacity in structuring, assessing risk, and leading financing initiatives for limited-recourse financing.”
The total assets of the financial sector stood at Rs 3,137 billion ($30.46 billion) as of mid-October 2017, according to the World Bank report that has also revealed that commercial banks account for 86 per cent of the sector’s assets. “As of 2017, bank credit to the private sector equaled 77 per cent of GDP, significantly above the South Asia’s region’s average of 47.6 per cent of GDP.”
The World Bank report also reads that the further consolidation should be encouraged over the medium-term horizon along with partnerships with inter-national banks to achieve up to 10 local banks. “This can be achieved,” the World Bank report suggested, “by increasing the paid-up capital to over Rs 16 billion.” Currently, paid up capital for a commercial bank stands at Rs 8 billion, though it was four times lesser just two years ago. The central bank has increased the paid up capital to Rs 8 billion two years ago to four times from Rs 2 billion then. However, the four times increment in paid up capital in two years could not force the commercial banks to go for merger as expected also as the central bank did not restricted to issue rights shares. Almost all of the commercial banks have increased their paid up capital to four times to Rs 8 billion in two years with the help of rights shares, and bonus shares.
However, the report does not make clear on what basis it determined the number of banks that the country needs.
“The balance sheet size of commercial banks needs to increase to enable them to offer sensible loan volumes to support the infrastructure sector,” reads the report ‘Nepal Infrastructure Sector Assessment’ released by the World Bank on Thursday coinciding with two-day-long ‘Nepal Infrastructure Summit-2019’. The summit was organised jointly by Confederation of Nepalese Industries (CNI) and Ministry of Physical Infrastructure and Transport.
Though the report assesses the energy, transport, and urban infrastructure sectors and highlights private sector solutions for sustainable infrastructure development, it has also recommended the government to further consolidate the banking sector to enable it to finance large-scale infrastructure projects in Nepal as a short-term priority action of up to three years.
The report also suggested that that lowering the number of commercial banks to less than 15 will help in developing the domestic banking sector’s capacity to finance infrastructure projects. The report also reads that reducing the number of commercial banks from current 28 to less than 15 will start to reshape the sector and provide banks with scale and efficiency to deliver consistent loan volumes. It has also concluded that Nepal’s domestic banks and financial services institutions are fragmented, subscale, and constrained in their capacity to finance.
“The domestic banking sector can also help in meeting the finance gap in the infrastructure sector,” the report reads, adding that it requires consolidation to enable more efficient deployment of capital. “Not only the mismatch in the asset and liability makes it difficult for banks to lend in long-term infrastructure projects, it has also been making interest rates volatile in the market.”
Due to an asset-liability maturity mismatch, banks have limited ability to lend in the long term, as evidenced by the 5-to-10-year average tenure of a term loan,” the report further reads, “Bank lending is further limited by high collateral, considerable sponsor support requirements, and a lack of experience and capacity in structuring, assessing risk, and leading financing initiatives for limited-recourse financing.”
The total assets of the financial sector stood at Rs 3,137 billion ($30.46 billion) as of mid-October 2017, according to the World Bank report that has also revealed that commercial banks account for 86 per cent of the sector’s assets. “As of 2017, bank credit to the private sector equaled 77 per cent of GDP, significantly above the South Asia’s region’s average of 47.6 per cent of GDP.”
The World Bank report also reads that the further consolidation should be encouraged over the medium-term horizon along with partnerships with inter-national banks to achieve up to 10 local banks. “This can be achieved,” the World Bank report suggested, “by increasing the paid-up capital to over Rs 16 billion.” Currently, paid up capital for a commercial bank stands at Rs 8 billion, though it was four times lesser just two years ago. The central bank has increased the paid up capital to Rs 8 billion two years ago to four times from Rs 2 billion then. However, the four times increment in paid up capital in two years could not force the commercial banks to go for merger as expected also as the central bank did not restricted to issue rights shares. Almost all of the commercial banks have increased their paid up capital to four times to Rs 8 billion in two years with the help of rights shares, and bonus shares.
However, the report does not make clear on what basis it determined the number of banks that the country needs.
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