Banking sector Nepal

How do you assess Nepals banking sector? The banking sector has succeeded in mobilizing about Rs. 600 billion deposit and lending around Rs. 500 billion. The competition is getting tougher, which has increased the cursory of deposits and interest rate of lending. Despite this, the banking environment is extremely challenging. Political instability and policy uncertainty cannot be conducive to any business, whether it be banking or any other sector. Banks margins are shrinking due to an intense competition in the backdrop of a lackluster economic growth. An average return on equity of the banking industry is bound to go south in the coming year. What is the present banking situation? Now, banks are more focused on consolidation rather than growth. As they are not in a good condition, they are concentrating their efforts on strengthening their capacity. This is the reason why there is a problem in credit lending. The control in lending of banks has hampered the growth of investment in different sectors. This is sure to have a negative impact on national economy. The main task of a bank is to accumulate all scattered capital and invest it in productive sectors. We can see that banks investment has been diversified to different sectors such as transportation, road, hydropower, communication, hotel, and industry. This has helped in creating a lot of employment opportunities. When these people are directly reaping benefits from banks earnings, they pay taxes to the government, who finally collects revenues. Therefore, when banks focus on consolidation rather than expansion, it impacts the overall national economy. The banking sector is often blamed that it is more inclined to profit forgetting the priority areas of the government. Do you think that banks should go to rural areas and invest in productive sectors rather investing in non-productive areas like housing? What do you say about it? Many of banks have invested in priority sectors as set by the government. Out of 26 commercial banks, some might have failed to follow the governments Indus ruction. But I am sure that most of their investment is in compliance with the governments priority. The next point is that the commercial banks by nature are established for making profit. They are not opened for charity. In every sector, if there is any possibility of making some profit, it is natural that commercial banks invest there. Both bankers and industrialists earn from such investment. Our investment is solely for profit making. We invest there where we suppose that the industrialist or entrepreneurs gain some profits and be able to repay our loan. It is our religion. We dont invest where there is no profit and security of our investment.

As per the NRBs data, the credit-to-deposit ratio of the commercial banks is imbalanced. The credit exceeds far more than the deposit they collect. How can this be so? I agree with this that there is disparity in credit-to-deposit ratio of commercial banks. So, I have already mentioned that commercial banks are now focused on consolidation rather than expanding their service sector. They should maintain the balance and they are in this process. There is another charge that commercial banks are merely centred in urban areas and their peripheries. What is your comment on it? The blame is quite baseless. Banks are expanding their services across the country and it will take some time to reach out to every nooks and corners. Besides, bankers require minimum infrastructures and activities to establish banks in the remote areas. They cannot establish banks in areas where there are no facilities such as transportation, electricity, communication, security and economic activities. If these facilities and activities are available at a place, no bank is needed to be dictated to go there. There will be a competition among them to expand their branches there. In this way, they are gradually expanding their services out of the valley, too. As the vice-president of the NBA, how have you planned to drive Nepals banking sector ahead? With an increasing number of banks, there is a danger that quality of banking service might suffer. This means that there is a possibility of banks being indulged with an unfair competition. The regulatory role of the central bank would be crucial in the days to come. We expect that the banking sector should be an efficient financial area in the country. There should be a healthy and fair completion. This alone will help enhance efficiency of this sector. When it becomes efficient, it yields desired returns to both for public and bankers. I will try my best to maintain a good status of Nepalese banking sector. The banking sector should be healthy and fair. There should be an effective monitoring, supervision and regulatory mechanism of the central bank. While banks and financial institutions are like players of a game, the NRB is their referee, who should be more active. The responsibility of maintaining fair environment lies in the central bank. It should be able to guide the banks and financial institutions with updated policy and regulations. The banking sector often raises the issues of skilled human resource crunch. What is being done to tackle this problem? It is true that there is a crunch of skilled human resources. As compared to the banking sectors expansion, the HR is inadequate. Considering this, the NBA, in association with the NRB, has taken the initiative to establish National Banking Training Institute (NBTI) with the support of the Asian Development Bank. NBTI will have participation also from RMDC, which is involved in micro-finance. We will also

be inviting development banks and financial institutions. NBTI will initially conduct short-term courses and eventually will set standards, conduct banking examinations and issue diplomas, thus evolving into a world-class institute. We have already recruited a CEO and it will expedite its work soon. As per Nepals commitment to the World Trade Organisation (WTO) during its accession on April 23, 2004, foreign banks can make their foray in Nepal. Do you think that the Nepalese banks will be able to compete with international ones? According to Nepals commitment to liberalization, it is now open to foreign banks. Initially, they will be allowed to carry out wholesale banking. No foreign bank has approached the central bank for opening their branches yet. But once there is political stability, foreign investment in the banking sector will come to Nepal sooner or later. So, there is no other option for the Nepalese banks but to go for mergers and acquisitions. But do you see any possibility for the Nepalese banks to go for merger and acquisition? The existing policy does not have any restriction for banks and finance companies to get merged. Until now, we have already witnessed two mergers of financial institutions: the merger between Laxmi Bank and Hisef Finance and that between Narayani Finance and National Finance. Of late, there has been some important developments on possible mergers of commercial banks. But various business houses are holding banks in Nepal. The mindset of bank owners and financial institutions not to let off their control, which has been a major obstacle to merger and acquisition. The ego problem of big business houses is the main problem behind this. Let us talk about your bank. In the crowd of Nepalese banking sector, where does your bank stands? Citizen Bank is a newly established bank. It has been just three years that the bank has started its transactions. If you asked me the latest information, we have just around Rs. 13 billion deposit out of a total of around Rs. 600 billion deposit of banks, and Rs. 11 billion lending out of around Rs. 500 billion. It is an infant in the banking sector. There are banks with around 60 years of experience. But we are just able to have our existence among them. Finally, would you like to add something more to this, please? Banks are rapidly expanding their reach and new players are joining the market. However, skilled human resource is becoming a serious constraint. The aggressive expansion of the banking industry and lack of skilled managers are throwing up new challenges with operational risk increasing by the day. The banking industry has been very successful in weathering the storm in the last decade and has proven to

be one of the best success stories in Nepal. This sector now needs to be taken to a newer height through adopting the best international practices both on governance and risk management fronts. It also requires new technologies, products, services and distribution channels so that the peoples access to finance can increase considerably.