Nubiz

Sectoral

Banking Sector: Opportunities and Challenges

By Sajag Karki

he Banking sector of Nepal is facing its ultimate test amidst political instability, liquidity crisis, unfavourable policies of the regulating body, sluggish economy and various other macro and micro economic factors. The ripple effect of global financial crisis of 20072008 has hit the Nepali banking sector as well. By strengthening the regulatory/ supervisory system and improving the implementation of new standards on quality and quantity of capital and liquidity and risk management, opportunities can be created for the banking sector such as branch outreach to rural areas, developing hydro power and tourism etc. Though there are a lot of challenges in the banking sector, many opportunities still exist which are yet to be exploited to their potential for the benefit of the Nepalis. Improving the worsening liquidity crisis that is directly affecting the operation of banks is the major challenge for the banking sector in the current scenario. Higher loan

investment made by banks compared to the deposit they have mobilised and

The banking sector in Nepal is bound to go through testing times with challenges and opportunities galore. A longterm clear cut strategy by the regulating body and a strong commitment from the banking sector is required for the holistic development and growth of this sector.

the regulatory provision that requires declaration of the source of the fund for a deposits exceeding Rs 1 million,

contributed to the liquidity crisis. This is the major issue that all the banks should address as an industry. They are currently outbidding each other to increase their deposits out of the same money that is in the system. In this process they are creating unhealthy competition and further aggravating the problem. There is a strong need for all banks and financial institutions (BFIs) to unite and convey a positive message to potential depositors to win back their trust in the banking sector. Due to the liquidity crunch, interbank short-term interest rate has crossed 12 percent. The continuous injection of liquidity by Nepal Rastra Bank (NRB) through repo sale over the last two months suggests a continuing liquidity crunch. Also the existing level of NonPerforming Assets (NPA) is not a good sign for smooth growth of the banking sector. The time has come to properly implement a prudent strategy for reducing NPAs. The liquidity crisis has resulted in declining private sector credit, while growth in the private sector credit is essential to create economic activities. The balance of payment (BoP) deficit which has reached Rs 16 billion in the first seven months of the current fiscal year further aggravated the liquidity problem. However, the banking sector is riddled with several other challenges. There is tough competition with 31 commercial banks and innumerable development banks and finance companies wanting a largeer piece from the same pie. Fresh funds have not been generated hence retaining depositors money remains a challenge. Despite a large number of BFIs, banking facilities hasnt reached 70 percent of the population. Another challenge is strengthening overall financial stability in general

72

New Business Age | June 2011