DR. SHIVRAM PD KOIRALA
Banks and Financial Institutions (BFIs) regulated by the Nepal Rastra Bank (NRB) occupy a substantial share of the Nepali financial system. Considering the key role of BFIs in promoting economic growth through efficient and effective allocation of resources, they need to be vibrant and stable.
Deposit mobilization of Rs 1154 billion and total credit of Rs 940 billion as of mid-May, 2013 constituting 67.9 per cent and 55.3 per cent respectively of Gross Domestic product (GDP) for 2012-13, market capitalization of 23.6 per cent of GDP and contribution of financial intermediation sector of 5 per cent to GDP indicate that financial market is mainly dominated by the BFIs.
Moreover, about 97 per cent securities listed in NEPSE are shares and out of which 80 per cent belong to BFIs. This corroborates the fact that BFIs have dominance in the capital market too. Hence, stable and properly functioning banking system is vital for enhancing the competitiveness of an economy.
It is heartening that access to financial services has substantially increased mainly after the domestic financial liberalization in mid-1980s. The number of BFIs surged from 5 in 1985 to 207, the number of branches and the population per BFIs branches accordingly reached 3126 and 8475 respectively as of mid-July 2013. However, the macroeconomic indicators are not at all conducive to support the rapid growth of the banking sector.
The recent unfair competition in the banking industry has led to most of these banks engaging in risky exposure e.g. real estate bubbles in the recent past trapped many BFIs into serious trouble.
In addition, the Nepali banking sector is rapidly globalizing, making it important for Nepali banks to ensure their practices match those of the best banks in the world. In fact, technology and global exposures have influenced this sector. Moreover, since Nepal has also opened up its financial sector to wholesale banking to international players from 2010, they will come with large capital, professional management, modern technology and an array of products. The saying “survival of the fittest” will undoubtedly appear true then for banking business under this kind of changing business and risk environment. In such a likely scenario of international competition and global exposure, Nepali banking industry has to move ahead with adequate preparation so as to be able to overcome both domestic and international challenges. NRB too needs to develop and execute Financial Sector Master Plan (FSMP) to ensure soundness and stability of the financial system.
Nepali BFIs, at present, are generally characterized by bad corporate governance, lack of transparency, management deficiency, illegal and unethical management practices, weak deposit and capital base, unfair business competition, absence of strategic plan, slow adoption of change and modern technology, poor internal control system, low customer focus, poor risk management practices and above all poor corporate culture etc. Despite the fact that a few foreign joint venture and private commercial banks are effortful to adopt best practices in line with the international level prudential norms, the majority of BFIs are still lagging behind. Three large public sector banks even after great effort at improving their financial health through constant reform measures cannot be considered vibrant and self-sustainable as they are still spoon-fed by the government to repair their balance-sheet.
However, gradual improvement in the financial indicators of these banks signify that if they are run in a business-like manner and the undue interference of the government and highhandedness of trade unions in management activities could be curbed, they can also be a strong players in the banking industry.
Unfortunately, Development Banks and Finance Companies are in the forefront to contribute towards losing public confidence in the banking sector. Liquidation of Nepal Development bank, United Development Bank and Samjhana Finance, rescue of Vibor Bikas Bank from NRB and declaration as troubled to Gorkha Development Bank and problematic to nearly a dozen of financial institutions has tarnished the image of the entire banking sector. As a fiduciary of public money, the current situation is unfortunate and the collapse of BFIs one after another may invite systemic risk. All the stakeholders need to be aware that both the East Asian Financial crisis of 1997 and the recent global financial crisis of 2007 were triggered by problems in banking.
The failure of financial institutions causing turbulence in banking industry obviously shows that the stable and properly functioning banking system is still lacking in Nepal. Hence, the possibility of taking advantage of financial globalization is a matter of distant dream in the existing economic and political milieu where banks are facing a volatile situation due to multiple risks threatening the sector.
Therefore, in order to take benefit of the financial globalization and ensure sound and competitive banking system, the government has to play a role in supporting infrastructural development of the banking sector.
source:KOIRALA ,DR. SHIVRAM PD (2013),"Financial globalization: Implications for BFIs ",The Himalayan Times,11 Sep 2013
photo/art: The Himalayan Times
Banks and Financial Institutions (BFIs) regulated by the Nepal Rastra Bank (NRB) occupy a substantial share of the Nepali financial system. Considering the key role of BFIs in promoting economic growth through efficient and effective allocation of resources, they need to be vibrant and stable.
Deposit mobilization of Rs 1154 billion and total credit of Rs 940 billion as of mid-May, 2013 constituting 67.9 per cent and 55.3 per cent respectively of Gross Domestic product (GDP) for 2012-13, market capitalization of 23.6 per cent of GDP and contribution of financial intermediation sector of 5 per cent to GDP indicate that financial market is mainly dominated by the BFIs.
Moreover, about 97 per cent securities listed in NEPSE are shares and out of which 80 per cent belong to BFIs. This corroborates the fact that BFIs have dominance in the capital market too. Hence, stable and properly functioning banking system is vital for enhancing the competitiveness of an economy.
It is heartening that access to financial services has substantially increased mainly after the domestic financial liberalization in mid-1980s. The number of BFIs surged from 5 in 1985 to 207, the number of branches and the population per BFIs branches accordingly reached 3126 and 8475 respectively as of mid-July 2013. However, the macroeconomic indicators are not at all conducive to support the rapid growth of the banking sector.
The recent unfair competition in the banking industry has led to most of these banks engaging in risky exposure e.g. real estate bubbles in the recent past trapped many BFIs into serious trouble.
In addition, the Nepali banking sector is rapidly globalizing, making it important for Nepali banks to ensure their practices match those of the best banks in the world. In fact, technology and global exposures have influenced this sector. Moreover, since Nepal has also opened up its financial sector to wholesale banking to international players from 2010, they will come with large capital, professional management, modern technology and an array of products. The saying “survival of the fittest” will undoubtedly appear true then for banking business under this kind of changing business and risk environment. In such a likely scenario of international competition and global exposure, Nepali banking industry has to move ahead with adequate preparation so as to be able to overcome both domestic and international challenges. NRB too needs to develop and execute Financial Sector Master Plan (FSMP) to ensure soundness and stability of the financial system.
Nepali BFIs, at present, are generally characterized by bad corporate governance, lack of transparency, management deficiency, illegal and unethical management practices, weak deposit and capital base, unfair business competition, absence of strategic plan, slow adoption of change and modern technology, poor internal control system, low customer focus, poor risk management practices and above all poor corporate culture etc. Despite the fact that a few foreign joint venture and private commercial banks are effortful to adopt best practices in line with the international level prudential norms, the majority of BFIs are still lagging behind. Three large public sector banks even after great effort at improving their financial health through constant reform measures cannot be considered vibrant and self-sustainable as they are still spoon-fed by the government to repair their balance-sheet.
However, gradual improvement in the financial indicators of these banks signify that if they are run in a business-like manner and the undue interference of the government and highhandedness of trade unions in management activities could be curbed, they can also be a strong players in the banking industry.
Unfortunately, Development Banks and Finance Companies are in the forefront to contribute towards losing public confidence in the banking sector. Liquidation of Nepal Development bank, United Development Bank and Samjhana Finance, rescue of Vibor Bikas Bank from NRB and declaration as troubled to Gorkha Development Bank and problematic to nearly a dozen of financial institutions has tarnished the image of the entire banking sector. As a fiduciary of public money, the current situation is unfortunate and the collapse of BFIs one after another may invite systemic risk. All the stakeholders need to be aware that both the East Asian Financial crisis of 1997 and the recent global financial crisis of 2007 were triggered by problems in banking.
The failure of financial institutions causing turbulence in banking industry obviously shows that the stable and properly functioning banking system is still lacking in Nepal. Hence, the possibility of taking advantage of financial globalization is a matter of distant dream in the existing economic and political milieu where banks are facing a volatile situation due to multiple risks threatening the sector.
Therefore, in order to take benefit of the financial globalization and ensure sound and competitive banking system, the government has to play a role in supporting infrastructural development of the banking sector.
source:KOIRALA ,DR. SHIVRAM PD (2013),"Financial globalization: Implications for BFIs ",The Himalayan Times,11 Sep 2013
photo/art: The Himalayan Times
Comments
Post a Comment