The banking industry of Nepal doesn’t seem to be going in right track. The ongoing interest war and expansion of banking network unprecedentedly has further aggravated the problem. Till date there are already 31commercial banks, 75 development banks & 84 Finance Companies in the country. Further few are in pipeline. Alone in Kathmandu there are more than 100 private commercial banks involved in the competition. Opening of branches and the installation of ATM machines has led to more idle cash lying around at branches and machines.
With the liquidity crunch banks are having a run for deposit. Banking and financial institutions are facing tough time to honor customer’s obligations. Liquidation of Nepal Development Bank Ltd., liquidity crunch of last September and recent charge sheet filed against top honcho of two of the development bank still haunts the depositors. They would rather feel safe to keep money in their home than to put in bank. The banks/FIs are luring depositors with higher interest rate. The interest rates vary from 10.25 % in savings to 12% in fixed deposits. Today the Nepalese banking sector due to stiff competition and excessive saturation face an informal interest wars where to allure the mass they provide competitive edge through high interest rates. Banks today are fighting for existence and their bread to keep them alive is the high interest they are providing to the customers against deposits. The wave of currency and banking crises that began in 2008 had come across as bearish with regards to the prospects for the Nepalese economy, but it's worth asking what exactly "bearish" means. It is the expectation below-trend growth. Is this real risk to the Nepalese economy? I see some of them as being fatal. And the opportunity cost is high. Years of economic slack mean missed chances at investment, innovation, and opportunity. Recent liquidity crunch in the money market has caused enormous pressure on banks and financial institutions to adjust the interest rate to a new high as there were no options left. Intense competition for business involving both the assets and liabilities, together with increasing volatility in the domestic markets as well as international markets, has brought pressure on the management of banks to rethink spreads between profitability and long-term viability. It is painful and the recoveries will be uneven that it can further cause deterioration of microeconomic stability.
NRB recent staunch stand on real estate sector in order to protect the economy as whole has further pushed bank note away from bank. Buying and selling of land has started taking place in personal capacity of an individual. As the liquidity crunch since December was a result of over-aggression in lending particularly in the real estate sector.
Decline growth of inflow of remittance in country, decreasing foreign reserves, trade deficit, rise in import of Gold, dwindling political atmosphere of country in terms of substance and mean, capital flight and etc., are contributing factors of economic slowdown. People with abundance disposable income was left with choice of either kept the money in bank or investment in some fixed assets (lack of invest opportunity). People resorted to second; as a result we have witness whooping growth in real estate sector.
It is not a light scenario this galloping interest rates is a high threat to the country’s banking sector credibility and existence. Industrialists have warned that the higher interest rates and liquidity crunch are likely to shutdown businesses. Deeply concerned about their investments, they have urged the Nepal Rastra Bank (NRB) to lower the interest rates and counter liquidity crunch.
Investors and industrialists from various business sectors are increasingly concerned about the galloping interest rates, shortage in Indian currency coming into the country and the increasing cost of doing...