Deposit-taking and contractual saving institutions make up Nepal’s financial system. Commercial banks, development banks, micro-credit development banks, finance businesses, financial cooperatives, and non-government organizations (financial) that perform limited banking activities are examples of deposit-taking financial institutions. Insurance firms, employee provident funds, citizen investment trusts, postal saving offices, and the Nepal stock exchange are examples of contractual saving institutions.
The Nepal Rastra Bank, the country’s central bank, regulates the banking sector. It also oversees the savings and credit cooperatives and financial non-governmental organizations that have been licensed by it to conduct restricted banking transactions. More than ten thousand cooperatives have conducted financial transactions, some of which are larger than tiny development banks.
The State of Nepal’s Financial Institutions:
Banks have recently faced a liquidity crisis. Excess liquidity was a problem in the financial sector a few years ago. Despite some advances, Nepal’s overall banking industry is weak in terms of liquidity issues. In recent years, the situation of banks has been volatile. Financial institutions’ liquidity issues have yet to improve. According to data supplied by the Nepal Bankers Association (NBA), the umbrella body for the country’s 28 commercial banks, commercial banks have a total of Rs 41.61 billion (rupees) available for lending (roughly $640 million). Rastriya Banijya Bank Ltd (RBBL), a government-owned bank, has Rs 24.78 billion, while the remaining 27 commercial banks have only Rs 16.83 billion available for loan. A perfect bank should always hold more deposits than grants. Financial institutions became mired in a liquidity crisis as a result of their failure to maintain the deposits/grants balance.
In the recent decade, the number of financial institutions in Nepal has increased at an exponential rate. The prevailing legal framework and institutional architecture in Nepal were not favourable to the overall development of the financial industry and private sector. After the World Bank and IMF advised the Nepal Rastra Bank (NRB) to minimize the number of financial institutions, banks and financial institutions that were founded and licensed without long-term planning began to fold back. They advocated for the creation of fewer but stronger institutions rather than a large number of weak institutions. The NRB created policies and advised banks and financial organizations on how to enhance their positions. To address the issues, regulations such as increasing the amount of capital required to form and maintain a bank, as well as encouraging bank mergers and acquisitions, are being established. As a result, the number of banks began to decline while their capital and position improved. There were 30 commercial banks, 84 development banks, and 53 finance firms in 2014. There were 30 commercial banks, 76 development banks, and 48 finance companies in 2015. There are 28 commercial banks, 55 development banks, and 38 finance companies, according to more recent data.
What role may financial institutions play in economic development?
The state and policies of financial institutions, as well as their interactions, are critical. Because of the liquidity crisis in financial institutions, the entire economy will suffer from excessive credit interest rates. Recently, the country’s 28 commercial banks decided to temporarily prohibit loans for autos, real estate, and loans against stock collateral (margin lending). This has a direct impact on the country’s economic situation. Due to a shortage of funds, business and investment expansions are hampered, resulting in a lack of employment possibilities and a fall in living standards.
Banks’ quality is deteriorating as they become less profitable. This is detrimental to the nation’s economic progress. However, the NRB emphasizes the importance of mergers and acquisitions in order to strengthen the institution’s efficiency and promote positive growth. Recently, a bank called Global Bank, IME Finance, and Lord Buddha Finance Company amalgamated to form Global IME Bank. Global Bank was able to expand its retail deposit through this merger; GBL’s deposit was roughly NPR 21 billion before the merger, but it increased to approximately NPR 38 billion after the merger. Its initial paid-up capital was NPR 1 billion, which was later increased to NPR 4.4 billion. This demonstrates how Global IME bank was strengthened as a result of the merger.
Nepal is a landlocked country with abundant water resources and fertile terrain. Despite the potential, a large amount of capital is invested each year to import food and energy. Agriculture and hydropower development initiatives can help our economy. Agriculture accounts for 35 percent of total GDP. 98% of the country’s 40,000MW of economically viable hydro potential remains untapped, while just 46% of the population has access to energy.
The development of agricultural sector financial institutions is critical. Various microfinance institutions have been developed to aid in the growth of the rural and agricultural sectors. They offer low-interest agriculture loans. Similarly, the Agricultural Development Bank (ADB), a government-owned bank, is making a significant contribution to agricultural development and hydropower projects. The Agricultural Development Bank is developing many projects for economic development, such as Arun III (hydropower-1.4 billion USD), Chemical Fertilizer Plant (agriculture-1.4 billion USD), and Tamakoshi (hydroelectric). It has the potential to reduce agricultural and energy imports, thereby contributing to the nation’s economy.
Nepal has a low economy that requires more possibilities to be created. While financial institutions are vulnerable, they can contribute to economic growth by mobilizing resources, finding worthwhile projects, monitoring managers, and controlling risk. Despite the growing importance of financial systems in achieving national economic goals, the government may fail to implement appropriate policies to address this critical issue. From the standpoint of development, the banking system plays an important role because financial intermediation generates an atmosphere that is more favourable to the transformation of a traditional economy into a contemporary one. Encouragement of savings and investments in productive areas such as agriculture and hydroelectricity could be the best way to expand and enhance the economy. Saving results in capital accumulation and investment, which leads to increased productivity, employment, and a higher standard of life.