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Unit 2 Challenges in Banking: A Nepalese Diaspora – RADHESH PANTA * ABSTRACT Nepal has become member of World Trade Organization (WTO) and has committed to open Financial Services Sector (FSS) especially banking services to the foreign banks and financial institutions by 2010. This could be threat as well as opportunities for banking sector of Nepal. The existing level of Non- Performing Assets (NPA) is not that much healthy sign for the smooth growth of banking sector. One should seriousl
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  Unit 2   Challenges in Banking: A Nepalese Diaspora Challenges in Banking: A Nepalese Diaspora Challenges in Banking: A Nepalese Diaspora Challenges in Banking: A Nepalese Diaspora    –  RADHESH PANTA * ABSTRACT   Nepal has become member of World Trade Organization (WTO) and has committed to open Financial Services Sector (FSS) especially banking services to the foreign banks and financial institutions by 2010. This could be threat as well as opportunities for banking sector of Nepal. The existing level of Non- Performing Assets (NPA) is not that much healthy sign for the smooth growth of banking sector. One should seriously need to re-think proper strategy for managing NPA. The predominance of rural economy urge bank and financial institutions of Nepal to peneterate in this sector with innovative products of microfinance as insurence, remittance, as to support poverty alleviation programme. Expansion of Small and Medium Sized Enterprises (SMEs) in rural sector could lured to banking sector to invest on it too. Managing inflow of remittances would yield fruitful outcome for Nepal. Public private partnership concept will be equally desirable for poverty alleviation, growth and expansion of banking service especially in the rural economy.  All branches of economic activity today are fundamentally dependent on access to financial services. In fact, it is the diversified intermediation and risk management services of the financial system which have made possible the development of modern economies. A healthy and stable financial system, underpinned by sound macroeconomic management and prudential regulation, is an essential ingredient for sustained growth. Conversely, macroeconomic instability emanating from weaknesses in the financial sector can undermine the process of development. The continuing globalization of economic activity, and the challenge of attracting productive investments in a competitive international environment, accentuates the need to maintain a healthy and efficient financial sector. In almost all advanced economies, financial systems deliver a broad range of financial services and sophisticated products, and the efficiency of such well-developed systems has contributed to macroeconomic stability and sustained economic growth and prosperity. Increased availability of funding and more efficient allocation of capital for productive private sector investment is beneficial economy-wide, with particular benefits for SMEs that are often constrained in their financing options prior to effective banking reforms and non-bank financial sector development. Thus, robust growth and effective functioning of a full service financial system is essential for economic development and prosperity. Over the years the importance of financial sectors development and its contribution to nations Gross Domestic Product (GDP) has been evident. FSS comprises over 9.91percent of the GDP in the Nepal. While impressive, the numbers belie the much larger role that this industry plays in the economy. Financial services firms provide the payment services and financial products that enable households and firms to participate in the broader economy. By offering vehicles for investment of savings, extension of credit, and risk management, they fuel the modern capitalistic society.  * Radhesh Pant, CEO of Bank of Kathmandu and President of Bankers's Association of Nepal (BAN).  Figure 1 1   Number of Financial Institutions 01020304050607080 CB's 5 10 13 18DB's 2 3 7 29FC's 0 21 45 70MCDB's 0 4 7 11SACC's 0 6 19 19NGO's 0 0 7 471990 1995 2000 2006  The essential functions performed by the organizations that make up the industry have remained relatively constant over the past several decades; however the structure of the industry has undergone dramatic change. Liberalized domestic regulation intensified international competition, rapid innovations in new financial instruments, and the explosive growth in information technology fuel this change. Competition has created a fast-paced industry where firms must change in order to survive. In addition, Nepal’s financial sector liberalization and commitments on the WTO forum further highlights the need for change. The current financial institutions market in Nepal clearly delineates a developing market with tremendous potential. With two large economies growing at a massive speed Nepal has a lot to gain from its neighbors. In addition to this, the recent peace agreement and sign of political stability in the country has further paved a way for prosperous future ahead. Hence, in order to capitalize on the existing scenario Nepalese financial sector seriously needs focus its activities in attaining higher economic growth. Few areas where Nepalese financial sector should focus are :   PRUDENT MANAGEMENT OF NPA’S  For the past few years we have seen that some banks have not been able to properly manage their level of NPA. As a result there has been constant pressure in their capital base as well as their profitability. Figure 2 Non Performing Assets 22.80%28.80%30.40%29.30%18.94%14.22% -30.0060.0090.00120.00150.00180.00 2001 2002 2003 2004 2005 2006    I  n   N   P   R    B   i  o . 0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%90.00%100.00% Loan NPL NPL%  Any kind of lending involves the following three stages where discretion needs to be exercised (a) Evaluation and assessment of the proposal (b) Timely monitoring and evaluation and (c) Proper assessment of exit decision and modality. Some of the commercial banks exhibit extremes of behaviors at each of the above stages. A rule-based approach precludes reasonable application of mind. Evaluation of project idea and the management is something that most of the banks are least equipped for. This has lead to the bank acting too liberal on all projects insisting on collaterals without taking into consideration any other competencies of the project and the entrepreneur’s capability. Further constant monitoring of major economic indicators which bears direct impact on the business is a must. Many of these banks have not been able to properly assess the impact of economic indicators on the growth and sustainability of the business. In addition to this, incompetence to properly assess the exit modality as and when necessary resulted in major disasters in terms of lending. These were the internal factors which resulted in the increase in the level of NPA of these commercial banks. Besides these, there are some major external factors that bear direct impact on the level of NPA of commercial banks. Commercial banks due to the ascendancy of these factors have not been able to pin down the willful defaulters and downsize the level of NPA. These external factors are: a) Legal impediments and time consuming nature of asset disposal process. b) Manipulation by the debtors using political influence and the weak corporate governance has been a cause for industrial bad debt being so high in case of government owned banks.   c) Bankruptcy laws favor borrowers and law courts are not reliable enforcement vehicles. d) Legal mechanisms to dispose bad loans were time consuming and expensive and NPAs remained on the balance sheet. If we look at our Asian counterparts, few years ago their financial system was following the same trail as ours. Till the year 2000 China had a NPA level of around 28 percent, Japan was also suffering from high NPA levels of 16 percent and India before 2000 had around 15 percent NPA levels. Prudently assessing the peril ahead they quickly acted upon and created environment which supported and uplifted the effort to reduce high levels of NPA. China a) Reducing risk by strengthening banks, raising disclosure standards and spearheading reforms of the state owned enterprises by reducing their level of debt. b) Laws were passed allowing the creation of asset management companies, foreign equity participation in securitization and asset backed securitization. c) The government which bore the financial loss of debt ‘discounting’. Debt/equity swaps were allowed in case a growth opportunity existed. d) Incentives like tax breaks, exemption from administration fees and clear-cut asset evaluation norms were implemented. Japan a) Amendment of foreign exchange control law (l997) and the threat of suspension of banking business in case of failure to satisfy the capital adequacy ratio prescribed. b) Legislation to improve information flow has been passed. c) Accounting standards with the major business groups established a private standard setting vehicle for Japanese accounting standards (2001) in line with international standards. d) Government support at the government’s committed public funds to deal with banking sector weakness. India a) Strengthening of legal norms aligning of prudential norms with international standards. b) Legal mechanisms including creation of Assets Recovery Companies (ARCs).
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