Clean up banking

The overall second-quarter profits of Nepal’s banking sector have shrunk by 22 percent compared to the same period last year. More than that, the fact that the three newest of the 31 banks in operation registered net losses in the period is a serious development and indicative of the weakening financial condition of the banking system. Frankly, given that most of the ills in Nepal’s banking industry have all erupted of late, they can be taken as the expected outcome of bad corporate governance and the risky lending practices of financial institutions, which were shaken to their foundations when the realty bubble burst in 2009.



Apart from the huge loan loss provisions that the banks have been compelled to earmark from their profits for their troublesome realty lending, bankers blame record low returns on government securities, in which banks are required to invest 8 percent of their total deposit mobilization, and the recent decision of the central bank to bar financial institutions from inter-bank lending, for the hefty decline in profits.



Yes, we agree that the record low return of around one percent on government securities is unjustifiable, given the much higher deposit rate that banks are offering to depositors to retain them. Undoubtedly, this is the result of the excess liquidity in the banking system. If the central bank foresees excess liquidity remaining in the economy for some time, it would be wise to relax the mandatory 8 percent investment in government securities. As far as the issue of banning inter-bank lending is concerned, we believe it is a good step, for it puts a check on easy access to finances for lazy banks and encourages the banks to find real borrowers and real depositors.



We believe the central bank should get all credit for managing a safe landing for the banking sector at a time of the worse troubles for this sector in Nepal’s financial history. Despite initial resistance and criticisms, it is now clear that the tough measures taken by the central bank have at least been able to avoid the risk of financial meltdown at some development banks and finance companies due to their 50 percent-plus loan exposure to the realty sector.



We support the central bank’s claim that the fundamentals of the banking system are still strong enough to withstand the present adversities, but at the same time we urge the country’s monetary authority to urgently launch a major clean-up operation to restore good corporate governance and avert any possible banking crisis in future. This is urgent given that several investigations have found the direct involvement of top mangers of financial institutions in making ill-intentioned investments with the aim of embezzling depositors’ savings.

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