BIKRAM RAI

Since the end of the Maoist insurgency, an average of three commercial banks has opened every year, with 32 commercial banks operating in the country today. The industry, which once showed immense growth even through the sluggish economy is now challenged by high liquidity, decreasing profits and increasing bad debts.

Excessive investment in the real estate sector is deemed responsible for the troubling clouds over the banking industry. It was suspected that growing loans in trading and manufacturing sectors were also making their way into real estate because even five years ago, banks were offering loans for housing and consumer durables at an average of 10 per cent interest rate.

"This money should have instead been directed to productive sectors and only then to consumer loans," says Governer Yubraj Khatiwada, adding that the opposite flow of money was also liable for creating an imbalance in the economy.

The financial indicators from banks have not been encouraging either. In the first six months of the current fiscal year, banks' profits declined by 29 per cent, even as bad debts doubled. In the last quarter, interest income grew by only 13 per cent, while interest expense soared by 28 per cent. The provision for bad and doubtful debts has also doubled. The interest spread is at 3.16 per cent. "The liquidity crisis has eased, but banks have to bear the high costs of funds, which is in turn affecting profits," explains Rajan Singh Bhandari, Vice Chairman of Nepal Bankers Association and CEO of Citizen's Bank.

The anti-money laundering acts, which Nepal is supposed to ratify within two months, also pose a threat to the banking industry. If Nepal fails to endorse the bills before the deadline, Financial Action Task Force, the international anti-money laundering body, will blacklist the country. This means that the letters of credit issued by local banks will not be easily accepted by foreign banks.

Banks will also have a hard time collecting funds. "The acts will require depositors to disclose minute details about their sources and not everyone will be willing to comply," explains Suman Joshi, CEO of Laxmi Bank.

The liquidity crisis earlier was partly caused by a regulation introduced two years ago which required sources for deposits of Rs 1 million and above and sources for car and property purchases to be disclosed. It was only after easing the regulation that money started flowing in the system again.

It is estimated that over Rs 50 billion is sitting idle inside the bank vaults right now. Banks say that despite high cost of these funds, they are being cautious while choosing their clients.

The government is also unwilling during this time of the fiscal year to soak up this fund in the form of loans. In the absence of a competitive private sector, the central bank is urging banks to identify new investment sectors. "Right now, the demand for credit is low. It's time banks started coordinating and directing funds for economic development," says Annal Raj Bhattarai, CEO of Commerce and Trade Bank.

Governer Khatiwada argues that there are opportunities in other sectors such as livestock farming and commercial cash crop farming, even in the periphery of major cities. Says Khatiwada: "In Nepal, if one business idea succeeds, everyone joins the bandwagon. It is important to identify new sectors for long term investment."

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The increase in liquidity has to be followed by an increase in investments