In recent days, a shortage of money has emerged in the market. This has hampered the deposit base of banking and financial institutions (BFIs). Although BFIs have employed various deposit schemes to strengthen the deposit base, they are yet to attain tangible results.
The problems have emerged in the banking sector since COVID-19 emerged three years ago. After the impact of the pandemic receded, BFIs started disbursing loans as per the demand of business entrepreneurs and the general public. But most of the loans were disbursed for real estate and speculation purposes. With the real estate sector and the share market going downhill, together with a shortage of money in the market, problems began to emerge in the banking sector. At the same time, the liquidity crunch made a dent in the loanable funds of BFIs. As such, loan disbursement has ground to a halt for months.
As per the data unveiled by the Nepal Rastra Bank (NRB), loans of Rs. 148.12 billion had been disbursed to the private sector till Magh during this fiscal year. During the corresponding period of last fiscal year, loans disbursed to the private sector were to the tune of Rs. 503.99 billion. This speaks volumes about a contraction in the disbursement of loans this fiscal year. Likewise, money circulation in October 2021 was to the tune of Rs. 727 billion, which has now come down to Rs. 625 billion.
It is not that BFIs have not made any efforts to increase their deposits. They have brought out various deposit schemes. Still, they have not been able to mobilise deposits to a desired extent. In the process of attracting deposits with higher interest rates, interest on loans has also increased. The business viability rule of thumb dictates that the maximum interest on loans should not exceed 15 per cent. A higher rate of interest on loans has affected businessmen and the general people. They have agitated against the tendency of BFIs to frequently hike the rate of interest on loans. In response, BFIs have reduced interest on savings deposits and new loans. They have said that they are reducing interest on existing loans with effect from the upcoming Baisakh.
There has been some improvement in the liquidity position. But businessmen and general people are in a “wait and see” position. BFIs have already announced that rates of interest on loans will come down from the Nepali new year. Further, they have also been influenced by protests against higher interest on loans. The agitation unleashed by Durga Prasai, a medical entrepreneur having close links with top political leaders, has also influenced the minds of loan clients. The other day, Prasai said that he would not repay loans taken from different banks till the rate of interest came down to six per cent. Some have demanded that loans of up to Rs. two million should be waived. This is nothing more than financial anarchy.
The remarks made by Prasai are utterly irresponsible. Maintaining the rate of interest on loans at six per cent cannot sustain the banking sector. If the interest were to be fixed at six per cent, how much interest would deposits attract? Two or three per cent? At a time when BFIs are not in a position to attract deposits by offering even eleven or twelve per cent, how can they mobilise deposits by offering two or three per cent interest?
When a loan is taken from a bank or some other financial institutions, it is the obligation of the loan client to repay the loan along with interest as per the loan deed executed between the financial institution and the loan client. It may be noted that interest on loans is raised as per the loan deed. There is a floating interest clause in a loan deed. As per the clause, interest may be raised or lowered as per market dynamics because we have an open market system. In most cases, loan clients acquiesce to all the terms and conditions as stipulated in the loan deed without even reading or understanding the terms and conditions. When the rate of interest is raised, they object to it. Loan clients have also mistreated or beaten the staff of BFIs. This has created a sort of panic in the banking sector.
Financial education is part and parcel of the financial sector. The level of financial education in the country is not adequate. Neither the central bank nor BFIs have prioritised financial education. It is not that no BFIs have conducted financial education programmes. Such programmes are conducted less frequently. It is high time fiscal and monetary authorities incorporated financial education in the fiscal governance policy so that it can be institutionalised for financial literacy, consumer protection and stability in the banking sector.
To improve the banking sector, there should be good corporate governance in BFIs. Inside trading may take place in a financial institution to benefit the relatives of promoters. Although the banking sector is considered the best regulated sector in the country, there may be lapses and oversight on the part of the NRB. As the regulating body, the central bank should therefore tighten and streamline its monitoring of BFIs so that they strictly abide by the provisions of corporate governance. BFIs should allocate their loans to the productive sector as stipulated by the NRB. Concentration of loans on real estate and shares is risky.
The government and the NRB should overhaul the key polices relating to BFIs and take stock of practical issues. A comprehensive review of such policies and issues is expected to be helpful in putting paid to the crisis seen in the banking sector.
(Maharjan has been regularly writing on contemporary issues for this daily since 2000.)