Financial globalization: Implications for BFIs

A stable and properly functioning banking system is still lacking in Nepal. Hence the possibility
of taking advantage of financial globalization is a matter of distant dream in the existing
economic and political milieu where banks are facing a volatile situation due to multiple risks
threatening the sector.
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DR. SHIVRAM PD KOIRALA

Banks and Financial Institutions (BFIs) regulated by the Nepal Rastra Bank (NRB) occupy a
substantial share of the Nepali financial system. Considering the key role of BFIs in promoting
economic growth through efficient and effective allocation of resources, they need to be vibrant
and stable.

Deposit mobilization of Rs 1154 billion and total credit of Rs 940 billion as of mid-May, 2013
constituting 67.9 per cent and 55.3 per cent respectively of Gross Domestic product (GDP) for
2012-13, market capitalization of 23.6 per cent of GDP and contribution of financial
intermediation sector of 5 per cent to GDP indicate that financial market is mainly dominated by
the BFIs.

Moreover, about 97 per cent securities listed in NEPSE are shares and out of which 80 per cent
belong to BFIs. This corroborates the fact that BFIs have dominance in the capital market too.
Hence, stable and properly functioning banking system is vital for enhancing the competitiveness
of an economy.

It is heartening that access to financial services has substantially increased mainly after the
domestic financial liberalization in mid-1980s. The number of BFIs surged from 5 in 1985 to
207, the number of branches and the population per BFIs branches accordingly reached 3126 and
8475 respectively as of mid-July 2013. However, the macroeconomic indicators are not at all
conducive to support the rapid growth of the banking sector.

The recent unfair competition in the banking industry has led to most of these banks engaging in
risky exposure e.g. real estate bubbles in the recent past trapped many BFIs into serious trouble.

In addition, the Nepali banking sector is rapidly globalizing, making it important for Nepali
banks to ensure their practices match those of the best banks in the world. In fact, technology and
global exposures have influenced this sector. Moreover, since Nepal has also opened up its
financial sector to wholesale banking to international players from 2010, they will come with
large capital, professional management, modern technology and an array of products. The saying
survival of the fittest will undoubtedly appear true then for banking business under this kind of
changing business and risk environment. In such a likely scenario of international competition
and global exposure, Nepali banking industry has to move ahead with adequate preparation so as
to be able to overcome both domestic and international challenges. NRB too needs to develop
and execute Financial Sector Master Plan (FSMP) to ensure soundness and stability of the
financial system.
Nepali BFIs, at present, are generally characterized by bad corporate governance, lack of
transparency, management deficiency, illegal and unethical management practices, weak deposit
and capital base, unfair business competition, absence of strategic plan, slow adoption of change
and modern technology, poor internal control system, low customer focus, poor risk management
practices and above all poor corporate culture etc. Despite the fact that a few foreign joint
venture and private commercial banks are effortful to adopt best practices in line with the
international level prudential norms, the majority of BFIs are still lagging behind. Three large
public sector banks even after great effort at improving their financial health through constant
reform measures cannot be considered vibrant and self-sustainable as they are still spoon-fed by
the government to repair their balance-sheet.

However, gradual improvement in the financial indicators of these banks signify that if they are
run in a business-like manner and the undue interference of the government and highhandedness
of trade unions in management activities could be curbed, they can also be a strong players in the
banking industry.

Unfortunately, Development Banks and Finance Companies are in the forefront to contribute
towards losing public confidence in the banking sector. Liquidation of Nepal Development bank,
United Development Bank and Samjhana Finance, rescue of Vibor Bikas Bank from NRB and
declaration as troubled to Gorkha Development Bank and problematic to nearly a dozen of
financial institutions has tarnished the image of the entire banking sector. As a fiduciary of public
money, the current situation is unfortunate and the collapse of BFIs one after another may invite
systemic risk. All the stakeholders need to be aware that both the East Asian Financial crisis of
1997 and the recent global financial crisis of 2007 were triggered by problems in banking.

The failure of financial institutions causing turbulence in banking industry obviously shows that
the stable and properly functioning banking system is still lacking in Nepal. Hence, the
possibility of taking advantage of financial globalization is a matter of distant dream in the
existing economic and political milieu where banks are facing a volatile situation due to multiple
risks threatening the sector.

Therefore, in order to take benefit of the financial globalization and ensure sound and
competitive banking system, the government has to play a role in supporting infrastructural
development of the banking sector.