Banking and Financial Institutions: Key Players in Boosting Up the Economy of Nepal
One of the most important elements to look for in a developing country like Nepal is economic growth. Banking and financial institutions have been major key players in boosting up the economy through the Nepal. It helps in promoting financial literacy and ensuring financial access throughout the country by providing accessible financial lending. However, it is equally important to emphasize the development of banking and financial institutions and markets. Alongside improvements of institutional quality and effectiveness of financial development and long-term economic growth is also needed.
Though the Nepalese financial sector history is not that long. It witnessed immense growth in the number of banking and financial institutions after the 1980s. From the year 2007 to 2012, the central bank issued licenses to all applications for new banking and financial institutions. Due to that, Nepalese citizens have access to financial services in a wide number of regions at almost every local level. However, at the end of 2012, NRB stopped issuing new licenses and started pushing the concept of mergers and acquisitions (M&A).
For the development of infrastructure, access to finance is a must. Nonetheless, failure to provide clear guidelines on raising capital for infrastructure projects and minimal financing options are the major obstacles in infrastructure development. Mainly, infrastructure projects in Nepal are financed by the means of debt and equity financing. Apart from this, NRB also regulates BFIs on their portfolios which limits their investment in infrastructure projects. In the case of equity, preference shares are the financing option. In addition, there are regulations on maintaining the debt-equity by the company investing in infrastructure.
New Merger law issued by Nepal Rasta Bank
In 2011, Nepal Rastra Bank issued the Merger by-law, with the objective of reducing the number of banking and financial institutions (BFIs). This would enhance financial stability, and promote public confidence in the banking sector. As a result, the banking sector is now experiencing restructuring and consolidation. At the time, the concept of Mergers and Acquisitions was an entirely new thing . There was much skepticism that the BFIs would go for merger immediately as there were no separate acts or regulations. In addition, the monetary policy of 2015 opened up a new way for banking sectors to adopt mergers and acquisitions. As it instructed to hike paid-up capital of banks by almost four times in order to make their capital base stronger.
The commercial banks had to hike their paid-up capital to Rs. 8 billion. National-level development banks to Rs. 2.5 billion. National level finance companies to Rs. 800 million. The encouragement for a merger by the NRB did result in the growth of the merger and acquisition activities. But sudden increment of the paid-up capital had an impact on the stock market which was not on anticipation. Though this decision was a positive step, they didn’t succeed in restricting the BFIs from issuing bonus shares and right shares.
Why and How it is done
Consequently, instead of entering into big mergers and acquisitions, the stock market was flooded with the shares of BFIs stocks worth Rs. 3000.These are now still trading for less than Rs. 600. So far, 187 institutions merged with each other to form 45 BFIs. At the end of Mid-July 2020, the total number of BFIs in Nepal was 69. As of Mid-July 2020, 27 commercial banks, 20 development banks, and 22 finance companies are currently in operation. Due to the central bank’s initiative of inducing big mergers, several development banks and finance companies have entered into the merger/ acquisition agreement with the commercial banks. It is likely to bring the numbers of banking and financial institutions further down.
However, a reduction in the number of BFIs is increasing the concentration of banks in the market. This can lead to instigates monopoly by decreasing the competition. Due to mergers and acquisitions, the market share of some banks might increase dramatically, and consequently, the increased bargaining power of the banks. This increase in power could give rise to cartels, collisions, and unhealthy practices which is harmful to the customer. Lack of access to finance can be a serious barrier not only in investment and business activities in general. Likewise, merging two or more institutions into one is not an easy task, especially when it comes to human resource management.
Some studies provide evidence that big bank mergers produce greater performance gains than small bank mergers. But in the case of Nepal, commercial banks are merging/acquiring development banks or finance companies rather than commercial banks. There is a lack of thorough studies on the impact of the merger on the financial performance of merged institutions.
New category of loan provision introduced by NRB, issued 2015
The Directive issued in 2015, NRB introduced a new category of loan provision as “watch list”. This helps in discouraging the practice of borrowers not utilizing the loans in projects where they were meant to be use. Banks used rigorous steps of credit monitoring. According to this directive, any loan that has crossed the repayment deadline by a month will come under the “watch list”. Also, short-term loans and operating loans whose deadline has been extended temporarily without renewal should be categorized under “watch list”. Likewise, loans extended to a borrower whose loans from another bank have turned non-performing, and negative cash flow for the past two years despite regular payment of principal and interest should also be categorized under the “watch list”.
In Monetary Policy for 2019/20, NRB revised the measures while issuing a loan. In accordance with the revision in the directive, the loan provided to the firms in priority sectors will define under watch list only if :-
- The firms undergo poor financial health for successive three years,
- And for the projects under construction
The watch list will only maintain after two years of the beginning of the production, based upon its financial health.
All the monetary policies and directives from the central bank, however, have not provided any sort of benefits for the infrastructure-related sectors. We can take the example of the hospital industry. Despite the government making substantial investments of billions of rupees, the public health service still not effective. Hence, the private sector’s entry is believe to make healthcare services enhance, professional, and more reliable.
Instability of development through investment
Nepal’s potential for development through investment in infrastructure has long been recognize. Too often political instability blame and put out in the front for serving as an ‘infrastructural bottleneck’. The real bottleneck faced by the country is management, government coordination, transparency, and accountability. Various studies have also shown that investment in infrastructure is often inadequate. Since investment without addressing the structural problems of governance will only worsen inequality. This can lead to unbalanced development, and considerable wastage.
To summarize, the economic growth cannot take place without an infrastructure base. For a strong infrastructure foundation, both the government and private sector need to come together. Studies have suggested that in order to overcome the infrastructure gap in Nepal, the public sector should change the policy of private sector.