Nepali banking industry has made a few major transitions over the last couple of decades. These ‘leaps’ have marked significant changes in the industry and its dynamics; whether it is the entry of knowledge into the industry during 1980s and early 1990s or the quantitative expansion of the Banks and Financial Institutions (BFIs) witnessed during the first decade of the second millennia. This article provides a brief overview of these shifts and tries to lay out the direction for next great leap that the Nepali banking industry, which is in a bit of disarray at present, desperately needs.
FIRST LEAP (1980-1995)
After the inauguration of Nepal Bank Limited in 1937, which marked the beginning of an era of formal banking in Nepal, upcoming decades witnessed slow (or no) slow growth of the industry until early 1990s when the country, following its political transformation, opted for economic liberalization. Lured by new-found business confidence and conducive environment in the country coupled with the vast array of untapped opportunities, as many as six joint venture banks commenced their operations in Nepal during the period.
At the time when the government-owned commercial banks had begun to exhibit serious portfolio problem because of their weak operational structure, mismanagement and imprudent lending decisions, these joint-venture banks lead the industry into a reasonably developed and enriched state through their prudent use of financial technology, flexible organization construct and modern management style. The major change stemmed from the introduction of customer-oriented marketing approach that these banks helped introduce in Nepal. Reversing the trend of customer knocking at banks’ door, these banks enriched with trained and smart staff, threw open their door to the customers. This model of banking operations set the benchmark for other BFIs that subsequently entered the market.
There have been two successful leaps in the history of commercial banking in Nepal. We need to consolidate the third.
This phenomenon, as a vehicle for technology inflows and an important source of management-knowledge for comparative efficiency and productivity, soon became a key feature of almost all the banks in the industry. They brought innovations in the financial sector that helped them increase output, enhance product quality, improve communication flows and maintain a degree of transparency within the banks and across the banking community. This set a benchmark for other institutions entered the market afterwards.
SECOND LEAP (1996-2010)
During his period several measures were undertaken to enhance competition and competitive capabilities of the banking system. Ceiling on share of ownership by foreign investors was increased from earlier 50 percent to two-thirds and later up to 100 percent. Nepal Rastra Bank introduced a new bank licensing policy in May 2002, which adopted a more liberal stance in ‘granting’ licenses to businesspeople interested in investing in the BFIs for lucrative and speedier returns, which other sectors could not provide.
As a result, the country saw an exponential growth in the number of financial institutions. In 1995 there were 44 licensed financial institutions while by 2010 the number had risen to 277, a staggering six-fold growth. Banks also increased their physical presence around the country. Number of branches of commercial banks expanded to 1,063 in year 2010 from mere 422 five years ago. This in turn has lowered the threshold of population per bank branch from 60,000 in 2005 to just below 27,000 now. Besides, with the entry of technology into the sector, banks have been serving their customers via various alternative delivery channels, initially through ATM terminals and internet banking and more recently through mobile devices, albeit they only offer basic banking services.
However, despite all these initiatives, the qualitative aspect of the financial system hasn’t improved much. One of the problems experienced by Nepali economy in the course of its rapid liberalization and expansion is that a large chunk of population is still beyond the reach of formal banking system. This is true not only of rural population and those living below poverty line, but also of households and small businesses operating in urban areas. Presently, financial services in Nepal are serving 1.667 million savings clients and 1.207 million loan clients (adjusted for duplication) whereas a whopping 5.684 million eligible population has no access to any kind of financial services (Dhakal, 2011).
The reason being that bank and financial institutions, at best, lack product innovation to serve the rural mass and are ‘imposing’ same products on them; and at worse, they are merely opening branches in sub-urban and rural areas as deposit collection depots to lend to urban wealthy who borrow in ‘large volume’ and can pledge ‘collateral’ against it.
As a result, on one hand, there has been excessive concentration of BFIs in urban areas fighting for a piece of the same (sized) market pie, as is evident by the fact that more than 53 percent of all commercial bank branches are located in the Central Region. One commercial bank has as many as 22 branches within Kathmandu valley. This has lead to unhealthy practices among the players as they are marketing mushrooming ‘me-too’ products, which are the same in all but name. These practices are apparently forcing them into price-based competition thereby cutting into their own margins.
On the other hand, there is another, more alarming, consequence of rampant growth of BFIs in the country—absence of good corporate governance practice—resulting in frauds and gross misconduct of insiders enabled by acute lapses in internal control and inadequate regulatory supervision.
NEXT LEAP (2011 AND ONWARDS)
The regulators have taken several ameliorative measures to improve this state of affairs. However, we need a substantial solution to the problem. In other words, the banking sector needs yet another strong leap forward.
Towards this end, BFIs should now focus on strengthening themselves not necessarily by merging with or acquiring other institution but preferably by organically consolidating their operations. They can pursue organic consolidation by adopting a two-pronged strategy—being solid inside and soft outside. In other words, they should profoundly alter both their operating and business models as defined by the ways they are organizing themselves and the way they are serving their customers, respectively.
Internally, they should simplify their processes and procedures enabled by use of technology as a strategic tool and insulated by robust corporate governance practices and control mechanism. This will bring resilience and excellence in company operations. Externally, they should customize their offerings to be flexible enough to avail convenient and high-level service to the unbanked rural masses and other under-banked population of the country. On the way to organic consolidation, this leap is highly awaited.
The writer is with the Business Development Department of Nepal SBI Bank Limited