Stop pampering banksBanks and financial institutions are once again facing a severe shortage of funds that could be immediately disbursed as loans. This is the second consecutive year that the sector has encountered this problem.
Banks and financial institutions are once again facing a severe shortage of funds that could be immediately disbursed as loans. This is the second consecutive year that the sector has encountered this problem.
Banking institutions are facing this problem due to a mismatch in deposit collection and credit disbursement. In simple words, they extended loans beyond their limit. This is unacceptable and is in violation of sound banking practices. If the regulator fails to take appropriate measures to curb this practice, the problem will continue to recur.
One of the major sources of funds for banking institutions is money sent home by Nepalis working abroad. The inflow of workers’ remittance had decelerated for quite some time before recording a negative growth of 1.4 percent in the first four months of the current fiscal year. This trend is unlikely to change anytime soon, because the number of outgoing migrant workers has dropped for two consecutive years. Banks are aware of this yet they have not diversified their deposit collection sources.
Another major source of funds for banking institutions is the government, which is the country’s largest spender. But the government’s capital spending—money spent largely on the construction of physical infrastructure—remains low in the better part of the year and surges towards the end of the fiscal year. Banks are also aware of this fact, yet this problem is disregarded when annual business plans are framed.
This indicates that banking institutions in Nepal lack foresight.
Ironically, Nepali bankers love to talk about prudence, but when it comes to handling their own businesses this quality seems to be lacking. One of the reasons for this negligence is pressure exerted by promoters to rapidly expand business. Since the banking institutions raised paid-up capital by up to four-fold following the central bank’s instruction, promoters have been demanding higher returns for which lending is being raised. This is a risky game. Yet banks do not seem to be worried because they are quite sure the central bank and the government will come to their rescue if they are in doldrums.
In March, when the banking sector faced a similar problem, the central bank had relaxed lending requirements. This time, the government itself has shown interest to channel a part of its surplus fund to the banking system to provide relief to cash-strapped banking institutions.
These types of relief packages will encourage banking institutions to play by their own rules rather than those of the regulator. This will ultimately create a vicious cycle wherein banking institutions will continue to lend beyond their limit, raising the spectre of Nepal facing another banking or even financial crisis. It would be wise to stop pampering banks now rather than regret it later.