TOPICS : WTO and banking industry in Nepal

In the mid eighties, the monopoly of two state-owned commercial banks and two development banks came to an end. Presently, 20 Class A, 38 Class B, 74 Class C and 12 Class D institutions are operating in the country and some more banks are in the pipeline to commence their business. Similarly, in the non-banking sector 64 institutions are operating in this service industry.

It is but natural for the Nepali banks to be concerned about the future, especially after January 1, 2010, when foreign bank branches operating at international level penetrate the domestic market. The central bank thinkers, economists, local bankers and their stakeholders are all expecting an unprecedented pressure of competition from the foreign bankers. These foreign bank branches will pose some threats and challenges to the regulators as they will operate between two laws: governed by their country of origin and regulation of NRB. The fear is, there is already a fierce competition for business amongst domestic bankers and the membership of WTO may add just more problems because the small deposit base and lending opportunity seem to be in a state of exhaustion and may have to be further shared with foreign bankers.

The assumption seems somewhat baseless. The domestic bankers need not panic right now because there are certain accession commitments, which will give ample protection to the domestic bankers. Foreign banks can open branches only after obtaining a license from the Central Bank or from the Monetary Board with the approval of the Ministry of Finance. It should be rated at least “B” by International Credit Rating Agency such as ‘Moody’s’ or ‘Standard and Poor’, etc. They are subject to domestic laws, rules, regulations, instructions, terms and conditions issued by the Nepal Rastra Bank or Monetary Authority.

Foreign bank branches can come as wholesale bankers only and can’t engage in retail banking like accepting deposits or lending to individual customers. Hence, they will not compete with domestic bankers. They can accept institutional large deposits and lend to local banks and financial institutions. Regarding loan classification, provisioning, income recognition, etc. the same prudential norms applied to domestic banks are applicable to foreign banks. In view of the above facts, there is no imminent threat to the domestic bankers as banks operating at international level can establish their branches only from January 1, 2010. In the long run also, banks may not have to suffer very much because the six Joint Venture banks that entered the business did not pose any threat but on the contrary assisted considerably in the development and growth of banking and other industry.

The challenges that the foreign banks are likely to pose to NRB can relate to bank rates, open market operations, money supply, inter bank transactions etc. Hence, local bankers can be assured that accession commitments to WTO have provisions for the protection of the domestic bankers’ interest.