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The study, whose findings were presented before the board of directors of the central bank last week, shows that since a rising number of financial institutions has had a positive impact on the economy in many ways, there is absolutely no need to review the existing liberal policy of granting permission for operating financial institutions once all the legal requirement are met.
Nepal Rastra Bank (NRB), the central bank, has granted permission to 235 financial institutions as of the end of last fiscal year, including 25 commercial banks, 58 development banks, 78 finance companies, 12 micro-credit development banks, 16 savings and credit cooperatives and 46 NGOs with limit banking functions.
Recently, some leading bankers including Nepal Bankers’ Association urged the central bank to stop issuing operating licenses to new financial institutions, arguing that the growing number of banks and financial institutions has contributed for unhealthy competition in the banking industry.
The study conducted by the Banking Regulations Department listed four major gains for the domestic economy that can be attributed to the liberal policy on private sector financial institutions.
The first gain identified by the study was the impressive and continued growth seen in the profitability of financial institutions. Profitalibilty has been maintained at an encouraging 25 percent on average over the last five years. According to central bank data, the overall profit of the 25 commercial banks alone during last fiscal year was over Rs 11 billion and this was 33 percent more than what was recorded during the previous year.
Widening access to financial services propelled mainly by the rapid increase in the number of financial institutions has been highlighted as the second major gain of the liberal policy on privately operated financial institutions. The total number of branches of commercial banks reached 555 by the end of last fiscal year as against 452 last year as a whole. State-owned Rastriya Banijya Bank has the largest network of 114 branches across the country.
In addition, as a result of increased financial accessibility, the GDP-deposit ratio has increased to 51.91 percent from 46.91 percent recorded last year. The same ratio in mid-July 2002 was 44.25 percent.
Likewise, growing interest rates on deposits were also hailed as one of the gains of the growing number of financial institutions. According to the study, the average interest rate on one-year deposits has scaled up to 6 percent at a majority of the banks whereas it was around 3 percent just two years back.
Similarly, increasing volume of corporate tax paid to the government because of growing profitability of financial institutions was also presented as a positive outcome of the liberal policy. According to sources, the total amount of corporate tax that financial institutions pay to the government has reached one billion rupees per year.
The report, among other things, also highlighted the immense employment opportunities that the expansion of the financial sector has generated. According to an unofficial estimate, around 10,000 people are directly employed in financial institution.
However, the report has highlighted a growing shortage of trained manpower as one of the problems that the domestic banking industry is facing.
prem@myrepublica.com
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