Nepali Times
My Two Paisa
Banking on banks



This time, last year, banks and financial institutions in Nepal were reeling under a severe liquidity crunch. Interest rates went up, lending went down, and investments suffered.

The good news is that the crisis has been resolved and banks can boast of liquidity surplus now. According to the latest half yearly review of the current fiscal year conducted by Nepal Rastra Bank, liquid assets of banks have increased by 24 per cent in contrast to a decrease of 15.3 per cent in the same period of the previous year. Relaxation on income declaration requirements, low credit flow, higher interest rates on deposits and elevated level of remittance inflows have contributed to the current improved liquidity position.

However, the increase in liquidity has not had the obvious effect of decreasing the credit crunch. Credit flow of banks and financial institutions has been lower than their deposit mobilisation. Credit flow has grown only by Rs 36.54 billion, while deposit mobilisation has grown by Rs 73.77 billion. Banks and financial institutions have been critised for hoarding money, not moving towards new areas of market or expanding the traditional lenders.

Last week, at Himalmedia Roundtable on Banking, bankers admitted to continuation of credit crunch, but attributed it to the lack of productive investment options. Earlier, the banking sector faced uncertainty when it doled out easy loans to real estate and consumer sector borrowers without assessing their capacity to honour interest and principal payments in time. "Banks have learnt their lesson and will give ad hoc handouts like they had previously and invite trouble," said the CEO of a leading commercial bank.

The bankers also said that there isn't demand for credit due to the risky investment environment in the country, with investors being plagued by power shortages and labour problems. At a time when even big players are struggling, not many new entrepreneurs have the courage to take the risk. The lower suppression of credit demand over the last few months, coupled with regulations imposed by the central bank regarding capital adequacy and liquidity have reduced the capacity of the banks to lend aggressively.

But banks are in the business of collecting deposits and issuing credit. The mismatch between the two will obviously affect the balance. Returns from earlier credit will not be able to hold up the cost of new deposits much longer. This is already being reflected in the decrease in profits of the financial institutions, with more than half of the banks reporting decline of profits in double digits in the last quarter. Banks have also seen a surge in their expenses, with over 15 per cent increase in operating costs.

A proportional increase in depositor base and diversification of investment portfolios is a must if we want a healthy financial system. The banking industry needs to be proactive now, and not just respond to demand or wait on the traditional big creditors. The banking sector has now reached 60 per cent of the population. And a majority of that population represents lending avenues in small and medium enterprises. The central bank has issued a directive to financial institutions to lend out 10 per cent of their total credit in agriculture, energy and tourism. But perhaps that is not an adequate measure. The attitude of bankers in the way they treat alternative investment options must change.

The bottom line, again, comes down to having the political will to improve the investment environment.

Read also:
In search of new avenues, PRABHAT BHATTARAI
The illusion of a loss-proof banking sector is slowing breaking

See also:
Mind your own business, PAAVAN MATHEMA
Mixing business with politics is driving investors away

Dirty business, PAAVAN MATHEMA
If we want to encourage investors we have to change the rules of the game

little brain-- no in depth knowledge about banking, I don't know why Ashoke Rana and the  so called PROFESSIONAL Bankers  can be and are not against these sort of comments, which spoils the image of the one and only PROFESSIONALS

(11 JAN 2013 - 17 JAN 2013)