The mysterious case of bank lendingsBanks continue to make handsome profits yet fail to lend money to the most vulnerable groups.
Around this time every year, various news media inform us matter-of-factly which of the Nepali banks made the highest profits and what those amounts were. Accordingly, we learnt that in the fiscal year just past, the 10 top-earning banks raked in a cool Rs35 billion, up from Rs28 billion the year before. With such a performance, stockholders are surely laughing all the way to their respective banks with equally gleeful employees in anticipation of the big fat bonuses soon to come their way.
This year, Nepal’s 28 commercial banks earned a staggering Rs65.2 billion in profit. Add to that the Rs7.3 and 1.8 billion net taken in by 29 development banks and 23 finance companies, respectively, and we are up to Rs74.2 billion. Again, add the 90 microfinance institutions (MFI), which together earned a profit of Rs6.6 billion, bringing the volume of profit from the banking sector to a total of Rs80.8 billion. What’s more, there are savings and credit cooperatives as well. In sum, there is a lot of money to be made through the provision of credit in Nepal.
It has always been a source of wonderment to me that an economy like ours can generate such astronomical profits. Especially when, all year round, the common refrain about Nepal’s banking sector has always been of the perennial liquidity crisis. In other words, the banks continue to complain that they have no money to lend, yet miraculously manage to pull in a pretty pile year after year.
Where’s the credit?
I do not quite understand the world of finance, but somehow I cannot shake off the feeling of something not being all right. Just in the past few days, we have learnt of this loan shark from Sarlahi district who has been preying on a whole village. Thanks to the massive publicity provided by the media, the man has been arrested, and an investigation is ongoing. Given how things work out in Nepal, and the chap probably has all the paperwork worked out in any case, I would not bet on his receiving his comeuppance. But even if he were only to learn a lesson and his exploited loanees granted some reprieve, his time in custody would have been worth it.
Such stories are legion in this part of the world and memorialised over and over again in popular culture. Yet, it was a sentence in the Kantipur story that stood out: this modern-day Shylock was apparently always ready to provide loans to ‘the poor, illiterate and Dalits’. While there is an overlap among these three categories, he must have preferred such debtors since that allowed him to inflate the loan amounts on the sly.
The whole episode, however, begs the question of why it is that the government has not been able to expand the formal sector to provide loans to these most vulnerable groups. Particularly since, for nearly 30 years, the Nepal Rastra Bank (NRB) has made it mandatory for banks and financial institutions (BFIs) to provide loans to what it has termed the ‘deprived sector’. At present, such loans have to comprise at least 5 percent of the total loan portfolio. Not counting the microfinance institutions (MFIs), disbursements by BFIs stood at 6.6 percent last year, with Nepal Bank Limited even reaching 10.2 per cent.
There appears to be a clear disconnect between this impressive proportion of credit being extended by the BFIs to the most marginalised and what was going on in Sarlahi, itself only representative of the reality of rural life all over Nepal. In order to understand what might be going on, a little foray into what passes for the deprived sector is necessary. An NRB paper from 2010 described the group of beneficiaries as being ‘low income people especially socially deprived women, endogenous [indigenous], lower caste, blind & hearing impaired, disabled, craftsman, artisan, small & marginal farmer and landless people’. It describes the rationale for this provision thus (with sics throughout): ‘From the very beginning, these people are excluded from the formal banking services. Basically, the lending to those people who are deprived of lending from the formal financial sector comes under deprived sector credit. The main objective of deprived sector credit is to uplift the socio-economic status of these people.’
So, what has been happening? A news report from 10 years ago reported that more than 50 BFIs had been penalised for not reaching the-then lower threshold of deprived sector loans. Three of these were commercial banks, which were fined Rs2.6 million by Nepal Rastra Bank. In the intervening decade, the banking sector appears to have improved its performance in this regard impressively.
Unfortunately, that seems to have come about more by redefining what the deprived sector consists of than by making active efforts to provide services to the deprived. A couple of representative examples are as follows. In 2018, it was announced that loans issued against academic certificates, and loans to students of marginalised and Dalit communities could be counted as falling within that category. Even earlier, loans for alternative sources of energy had been included.
A Google search with the keywords ‘deprived sector loan nepal’ showed 219,000 results. Going through the links to the first three commercial banks that showed up took me to their sites on deprived sector loans. It was revealing that almost every bank had its own definition of the deprived sector. Hence, NCC Bank had ‘Mahila, Janjati, Dalit, Farmers and foreign workers etc’; Prime Bank, ‘Institutions/Microfinance Companies working for the deprived sectors’ and ‘Skilled Nepalese craftsmen doing Handicraft business since last one year (metal, stone paving, wood paving, jewelries and similar business)’; Himalayan Bank was ‘providing deprived sector financing (directly or through intermediary) to various organisations that falls under the deprived sector financing as prescribed by Regulatory Authority’.
By far, the most common medium of meeting the 5 percent target appears to be lending to MFIs, who do the actual lending to the deprived sections of the population. And, by definition, the interest rate of MFIs, although much lower than informal sources, is pretty high. This is mainly due to the high administrative costs involved in the very small transactions they deal with. Sadly, combined with the extremely fierce competition for clients among the ever-increasing number of MFIs, it has resulted in large numbers of people burdened by loans they have no means of repaying, as detailed in the cover story of Himal Khabarpatrika recently.
That part of the billions of rupees in profit generated by the banks also includes contributions by the most vulnerable sections of society is a sad commentary on us all. Given the clout commercial banks have over MFIs, the least they could do is use it to ensure that the latter do not overcharge their clients or provide multiple loans to those without the ability to pay. Or else, how would the banking sector be any different from the money-lender from Sarlahi?
What do you think?
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