Gopal Tiwari

Kathmandu, July 12:

Nepal’s financial sector, which accounts in terms of assets to over 56 per cent of the national gross domestic product (GDP), seems to have a roller coaster ride despite several reform initiatives taken in the past. The two largest commercial banks, Rastriya Banijya Bank (RBB) and Nepal Bank Ltd (NBL), are still awaiting financial deliverance despite reforms having been introduced following the introduction of new managements. As per government statistics, the total capital base of RBB and NBL has gone negative by Rs 29.9 billion. These banks had to maintain a capital base of nine billion rupees, a level they have failed to sustain. Rs 39 billion capital injection is needed for effectively carrying forward further reforms in these two banks.

The overall banking sector’s capital has turned negative by over Rs 17 billion, due primarily again to RBB and NBL. Capital adequacy needs to be maintained for the well-being of the reform process.

Banking sector’s assets in relation to the total GDP in 2004 increased by over 50 per cent, while it was only 24 per cent during 1980s. Non-performing assets is a crucial indicator for financial sector reforms. NPA of the banking sector is Rs 29 billion (in absolute terms). The banking sector holds 23 per cent NPAs of their total loans. Other serious problems besetting the financial sector are deteriorating discipline of banks and ad-hoc financial intermediation.

“Since the financial sector is a viable sector, the government should sustain this sector with appropriate policies,” said Prof Dr Bishwambher Pyakuryal, a senior economist. There is a need to bring policies based on consensus regarding investment and savings regime to make the financial environment more viable. Capital adequacy in the banking sector is also not adequate, he said. Limited opportunities for investment have questioned the very survival of the financial sector. “Crisis of confidence and lack of congenial policies have directly hit its growth,” he commented. The regulator of the financial sector, Nepal Rastra Bank (NRB), also needs to make its supervision more effective.

Total deposits of the banking sector during 1985 accounted for about 16 per cent of the total GDP which increased to over 43 per cent during 2004, thanks to increased market potentials and further liberalisation of financial sector following 1990. Yogendra Shakya, chairman of Ace Finance Company Ltd, commented that investors are caught in a dilemma currently. If they do not invest, they will have a slow death and if they invest, they are not going to get returns on investments. “We have gone through this in the tourism sector and I see the same being repeated in the financial sector. The government should take into account the precarious situation of investors,” Shakya said. Despite such odds, the banking system in Nepal is slowly maturing. Even RBB and NBL have generated some profits. People associated with the financial sector must come out of the box and think innovatively to make the sector a viable and sustainable engine of growth and prosperity.