When banks grant loans or provide credit facilities, they mention the annual interest rate as a percentage in the voucher, commonly known as 'tamasuk'
The regulatory body, Nepal Rastra Bank (NRB), grants permission for the establishment and operation of banks and financial institutions in the private sector within its jurisdiction. Under this permission, commercial banks, development banks and financial institutions operate within the designated boundaries and engage in lending activities, following the directives issued by Nepal Rastra Bank. The primary responsibility of these banks and financial institutions is to ensure that banking services reach every ordinary citizen when needed, and Nepal Rastra Bank is responsible for overseeing their adherence to this goal.
While serving the purpose of facilitating citizens, banks engage with the general public in various financial activities. Individuals with surplus cash deposit it in banks, while those in need of funds take loans. Typically, entrepreneurs seek such loans to invest in their businesses, with the intention of repaying the borrowed amount along with interest to the bank, while also retaining some profit for themselves.
Through these activities, banks directly contribute to the economic development of the nation, creating more job opportunities, supporting livelihoods and generating tax revenue for the state. Considering these factors, it is evident that banks and financial institutions play a significant role in the smooth functioning of the state.
Nepal Rastra Bank, entrusted by the government, regulates and supervises all banking and financial institutions in the private sector through licensing. It ensures their compliance with prescribed regulations. When comparing our banking system with that of other countries in the world, let's say our neighbouring countries India or China, or Singapore, Malaysia, Hong Kong, or a little farther into European nations such as France, Germany, Switzerland, or even other nations such as America, Canada or Australia, we can observe that the development of their banking systems, their banking operations and how their citizens avail themselves of banking facilities differ from ours.
A prominent difference is in the functions served by the commercial banks, the financial institutions and the development banks. The development bank in these countries work with long-term investments, long-term installments and big project operations with non-commercial goals; the financial institutions work with smaller loans and deposits from households; the commercial banks are the ones with the capacity to provide greater deposits and greater loans for longer time periods. Although this is how each of these banks should be functioning, it is sadly not the case in our country.
Commercial banks easily provide both smaller and larger loans, due to which financial institutions start acting in an irrationally competitive manner as well. Development banks don't properly fulfill their own distinct purpose either. However, this isn't the sole problem in the banking sector of Nepal.
When banks grant loans or provide credit facilities, they mention the annual interest rate as a percentage in the voucher, commonly known as 'tamasuk.' Once the bank states the interest rate in the voucher, it should not decrease or change it at its own discretion. Any unethical adjustment in the interest rate causes significant problems for customers.
Consider a scenario where an entrepreneur borrows 5 lakhs payable over 5 years with a monthly installment of Rs 20,000. The entrepreneur creates a budget plan based on this loan, anticipating revenue and allocating funds for installments and employee wages. If the bank suddenly demands 25,000 instead, the entrepreneur incurs a loss of 5,000 each month. Continuous losses may lead to default, blacklisting, or the sale of assets as per banking regulations. Unfortunately, such situations are witnessed frequently in Nepal's banking sector, where banks thoughtlessly crush the dreams of citizens striving for financial stability and a better life.
Interest rate revisions burden entrepreneurs and have a ripple effect on the general public, as many households struggle to make ends meet. Additionally, this financial distress and brain drain pose potential crises for the banking and financial institutions. Thus, it becomes imperative for Nepal Rastra Bank to thoroughly examine and address this issue.
Nepal Rastra Bank is considered independent under the law established by the Parliament or through legislation. However, despite such claims, the extent to which it is truly independent needs to be understood. Nepal Rastra Bank is required to follow the annual policies set by the Government of Nepal. Only while remaining in accordance with those policies can the bank advance and carry out its own initiatives.
Similarly, the restrictive actions related to international agreements, as indicated by the IMF and World Bank, cannot be denied by Nepal Rastra Bank. Therefore, regardless of the claims of independence, NRB cannot ever be considered truly independent.
There are other reasons to this as well: the overall economic situation, the social condition and the geographical limitations are some major ones. In any case, we are bound to accept and abide by the rules and requirements of the international treaty agreements.
In conclusion, Nepal Rastra Bank must demonstrate prudent leadership to fulfill its responsibilities entrusted by the state. It is crucial for the central bank to ensure positive and timely monitoring and supervision of licensed financial institutions, rectify actions that infringe upon the rights of the general public, evaluate, revise and provide necessary guidance to banks and financial institutions to fulfill their duties effectively. Only then can Nepal witness a brighter future of its banking sector and the overall economy.
A version of this article appears in the print on June 30, 2023, of The Himalayan Times.
