Most of the banks’ balance sheets have been affected due to the country’s slow slow-moving economy. The number of industries and businesses are blacklisted which is also increasing day by day. As banks are unable to collect loans and interest, bad loans continue to rise.
Investors have not been able to get returns from the billions of rupees invested in the banking sector when the profits of the banks have decreased. Recently, the Nepal Bankers’ Association has also conducted a Program on “Current Scenario in the Banking Sector and the Way Forward.”
During the program, Senior bankers have been stating that if they reduce the interest rate, the problem of the sluggish economy will be improved, there has been no improvement yet. They said that due to low supply and demand, businesspeople could not pay interest according to the loan size.
In the last fiscal year, despite problems in other indicators of the economy, the banking sector was strong. Even if the investors do not get returns due to the decrease in the bank’s profits, the increase in bad loans is a matter of concern. It appears that the financial sector is in crisis.
As the revenue of the banks is also affected when the profit of the banks is reduced, it has a direct impact on the state operations. If the government is unable to collect revenue as per the target, development works will be affected.
Crisis at glance
From the early stage of implementation of liberal economic policy in the country, the Nepali banking sector has disbursed billions of being Kathmandu valley-centric. And most of the private sector banks are doing massive insider lending practices.
The major beneficiaries are the kith and kin of the promoters. On that note, a deepening crisis of corporate governance in the entire financial system is an even greater danger. Second, large investments in BFIs have been made by major business units in Nepal, such as availing credit facilities from other banks and financial institutions.
Due to this synergy has not been seen in the Banking and Financial Institutions (BFI) after the merger and acquisition of BFIs. Third, bankers have followed the unethical and ad hock practice of lending to achieve unrealistic business growth of the BFIs for satisfying investors of the BFIs, which have become accepted norms in Nepali BFIs.
Due to this most of the disbursed SME loans by BFIs have indirectly invested in the real estate sector of the country which has created demand for loans in the economy previously before the implementation of working capital guidelines by regulation bodies.
Similarly, large investments are generally concentrated in the speculative market and consumer financing—vehicles and private housing. Barely 20 per cent of the total investment has been in the productive sector, which explains the country’s low productivity and slow economic growth.
Besides these, Nepal’s banking industry often faces volatility in liquidity. Nepal’s liquidity market is caught between the proverbial devil and the deep blue sea. Federal, provincial and local three tiers of government have persistently failed to spend the capital budget which is the single largest source of liquidity in the financial market.
Also, a decent level of capital expenditure would have acted as a catalyst to increase private investment. Capital expenditure by the federal government in the current fiscal year reached a minimum level of the allocated one. The performance of the provincial and local governments is equally at a low level.
What next?
Both the fiscal and monetary authorities must work parallely to address problems of this magnitude with solution for sustainability in the Nepali banking sector. Key policy’s comprehensive review and reassessment of practical issues are required.
Substantial investment of BFIs in Kathmandu-centric real estate should be duly taken care of and it should be diversified. Massive insider lending practices of the BFIs should be curbed. For maintaining corporate governance in the entire financial system practice of investing at BFIS by business unit should not be allowed which has been the best practice in most of the countries even our neighbouring country.
Current working capital guidelines of regulation bodies should be revised and reviewed depending on the condition of the country’s economy. This warrants an independent set of policy reviews and adjustments. The regulatory authority of key regulators of the financial markets has been hindered by a pervasive conflict of interest.
In such a situation, it is difficult to distinguish between regulators and market players. In the day to come, bankers should also follow ethical and good practices of lending not only to achieve unrealistic business growth of the bank for satisfy investors of the bank. The large amount should be investments in productive sectors, and agricultural sector rather than speculative market and consumer financing.
Blacklisting small and mid-corporate level businesses is not the solution at all. Nevertheless, it is the nature of law for the survival and continuity of the big one the survival and the continuity of the small one are equally important. To conclude it is a call of time for the top-level management team of banks, authorities and the Nepal government should act transparent and accountable to the nation’s sluggish economy and bring it back to normal conditions for promoting and maintaining sustainability and healthiness of BFIs.
