Budget 2006-07 : A long way to go

Kathmandu, June 22 :

Nepal’s financial sector contributes more than 10 per cent to the national gross domestic product (GDP).

This crucial sector seems to be swimming in troubled waters for sometime

now, notwithstanding the past initiatives by the government and Nepal Rastra Bank (NRB).

Though the environment has been quite tricky for expanding financial transactions due to conflict and political unstability in the country, financial institutions have been ‘surviving’. But, both private and state-owned banks do not seem to be out of the woods yet.

The major problem stalking the Nepali banking sector is non-performing

assets (NPAs) that stand close to a staggering Rs 29 billion as a whole, which is above all attributed, to slow implementation of policies and directives issued by both the government and the Nepal Rastra Bank (NRB).

Of the total banking sector’s loans worth Rs 15,97,96 million to different sectors so far, 18.19 per cent goes under non-performing loans, according to NRB sources.

Nepal Bank Ltd (NBL) and Rastriya Banijya Bank (RBB) occupy the lion’s share in these NPLs.

As per international norms, NPA level should be maintained below five per cent. But NBL and RBB have NPAs far in excess of this. RBB recently has reduced its NPA to 50 per cent from its earlier 57 per cent. Similarly, NPAs at NBL run into 43 per cent.

If this Rs 29 billion in NPL is not recovered, it would obstruct all economic activities in the country.

NRB was made autonomous as per an NRB Act 2002, but failed to act as per its mandate, which has led to further problems in the financial market.

Majority of private commercial banks are performing well, due primarily to their focus on retail lending in recent years. However, they will find it difficult to sustain them if the investment sector does not get diversified.

Thus, investment in bigger projects must start for which peace and stability are a rerequisite.

Finance companies are also an important component of the financial sector, which has also been cramped for space for the last couple of years. Promoters of finance companies commented that despite these financial institutions having been established with a low capital base, they are being treated at par with banking institutions in terms of rules and regulations issued by Nepal Rastra Bank (NRB). This is blatantly unfair, according to them.

The other most import pivot of the financial sector, NRB has also failed to improve upon its supervisory capacity. Cost of capital in financial institutions has not been reduced, which helps to realise real market rate of interest and send positive messages to depositors. Cost of borrowings should also be brought down.

Dr Shankar Sharma, former vice chairman of the National Planning Commission (NPC), while talking to The Himalayan Times, commented that the government and the judicial system of the country have to support the financial sector.

In the past two years, only small borrowers’ cases have been settled through the Debt Recovery Tribunal (DRT) but nothing has been achieved in terms of ‘medium and big defaulters’, Sharma informed.

“DRT needs to be made effective. Major indicators of RBB and NBL have improved lately, but NPA is still high,” said Dr Sharma requesting judicial support to reduce NPA.

NRB, Dr Sharma noted, should expedite implementation of rules and regulations with effective monitoring and supervision. NPA of Nepal Industrial Development Corporation (NIDC) comes to 85 per cent. However, government has been dragging its feet liquidating it in time, he said.

NRB officials opined that existing mechanisms are not sufficient to catch the 22 ‘big borrowers’. Thus, an extra ‘political will’ is the need of the hour.

NPAs still remain high in big banks, thanks to dilly-dallying by big borrowers and a weak government mechanism. Even after three or four years, big borrowers have not paid back loans, pointed bankers.

If a roundtable conference is held, involving all the big borrowers along with donor representatives, bankers, RBB and NBL representatives, it can possibly help solve the problems.

The introduction of a ‘limited liability’ concept by former finance minister Madhukar SJB Rana and state finance minister Dr Roop Jyoti has affected loan recovery by banks, specially for the ‘big fish’, says NRB officials on conditions of anonymity.

Former finance secretary, Bhanu Prasad Acharya opined that the main problem of the financial sector is loan recovery. Whatever policies are made, implementation has been tardy, he said.

The absence of an Asset Management Company (AMC) has not helped in the battle against NPAs. The Dr Shankar Sharma Task Force had recommended strong steps to reform the banking sector, but they could not be implemented.