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NePALeSe BANkING cRISIS exPLAINeD
chANDAN SAPkoTA*
ne h bee ggig mii
mcecmic bce ce
ye w. lw gwh e, high
emyme, bce yme
decit, ballooning trade decit, andhigh and sticky ination are some of
he eig exiig mcecmic
chege. nw, h i
bkig iqiiy cie—
egeee gey by he bk
nancial institutions (BFIs) themselves
me exe by ne r
Bk (nrB), he ce bk— i
i ceqece i bey
he bkig yem.
the nrB ige he hehycmeii, qeibe eig
ew ec, gvece i
nancial sector. In doing so it let new
BfI wih eve evig i
he ecmy ee my hem,
k mge c mee
e. Mewhie, he BfI egge
i hehy ime eig
eei vive mi
ch cmeii, which i geig
y by he y. the BfI’ ibiiy
eecivey ce wih he ee icee ei eig,
attain unsustainable prot targets is
leading to a situation where all prots
e ive b e e ci, i.e.
xye y he c ecke
bie cice he BfI i he
m exeive ece ckge.
Wih ee c chge i he bkig
iy, ne wi ee my ‘nhe rck mme’
evey i ‘lehm mme’ we.
the eecy eek h em, qick e gi
g em vibiiy ibiiy i eig he BfIi h e-eci. f hehy bkig
iy, ne ee ewe b ge BfI wih
ce gvece. fheme, hee h
be ehceme egy eviy
capabilities of NRB. The playing eld has gotten
eceiy cgee mi e h ie
gwh e i he mbe ei vi-à-vi BfI.
NoRTheRN Rock AND LehmAN momeNTSWhe Vib Bik Bk (VBB) kcke he
ne r Bk (nrB) Je 9, 2011 eiheijec mey i he eveme bk ke ve
mgeme, i e he bkig iy he
ey ici ei. thee wee m
icii h e exceive exe
e ee, hig cci ec bk
nancial institutions (BFIs) will land in the red sooner or
e (shm, 2011).
the e mve by Vib me ei ic
policymakers scurry to nd a way to avert a ‘Lehman
mme’—he y whe us iveme bk lehm
Bhe ce (seembe 15, 2008) iggeethe global nancial crisis that was ensued by the global
ecmic cii. I ne’ bkig hiy, he ece
Vib i ‘nhe rck mme’—he y whe he
Bank of England extended emergency nancial support
he be mgge ee seembe 17, 2007
ve i m cig.
* mr. spko i reercher souh ai Wch on trde, Econoic nd Environen (saWtEE), Khndu
BANkING Jour nal of Inst itut e of Charter ed Accountants of Nepal, Vol.13, No.4
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BRIeF hISToRy oF BFIS GRoWThthe iiii m bkig yem i ne
cmmece wih he ebihme i 1937 ne
Bank Limited (NBL), the rst Nepalese commercial
bk. the cy’ ce bk, ne r Bk(nrB) w ebihe i 1956 by ac 1955,
e ey w ece nBl’ exiece. a ece
e he ebihme nrB, riy Bijy Bk
(rBB), cmmeci bk e he wehi
he Gveme ne w ebihe. ae he
nancial liberalization in the 80s, a third commercial
bank in Nepal, or the rst foreign joint venture bank,
w e ne ab Bk l (w naBIl Bk
l) i 1984. fwig hi, w eig ji vee
bk, ne Iez Bk l (w ne Iveme
Bk) ne Giy Bk l (w s
Chee Bk ne l) wee ebihe i 1986 1987 eecivey.
I 1983 1993 hee wee w eigh cmmeci
bk eecivey. By Jy 2006, hee wee 17,
icig ji vee. thee wee 4 eveme
bk i 1993, which wee 29 i 2006. fice
cmie cme i exiece i 1992 by Jy
2006, hey mbee 63.
fige 1: nmbe BfI i ne, 1980-2010
Source: Author’s compilation using Bank and Financial
Statistics 2010 and Economic Survey 2010/11
Cey, hee e ve 308 BfI, icig 31
commercial banks, 87 development banks, 80 nance
companies, and 21 micronance institutions.
the gwh i mbe BfI i eceee
we by he ecmic bkig me
he ece.
STATUS oF BFISa mi-Jy 2010, e ei
i bkig ec me r 996.1 bii r
795.3 bii eecivey. the me
r 622.6 bii. the mke he ei
cmmeci bk h ecie m 85.6% i mi-
Jy 2008 79.4% i mi-Jy 2010, whe he he
of development banks, nance companies, and other
BfI w 9.7%, 10% 0.9% eecivey (Miiy
fice, 2011). I he hee ye, hee h bee
igh ecee i ei i cmmeci bk b
increase in development banks and nance companies
(ee fige 2).
Mewhie, he , cmmeci bk’mke he h ecie m 78.6% i mi-Jy 2008
74.2% i mi-Jy 2010. dig he me ei,
the share of total loans of development banks, nance
cmie he BfI w 10.6%, 12.8% 2.4%
eecivey.
a ai 2011, nrB hw h he ei
cmmeci bk r 642 bii. o
he cmmeci bk’ ei, em ei,
savings deposits, and xed deposits stand at 12%, 36%,
52% eecivey. they hve iqi r 114
bii (ch i h r 16.2 bii, ei wihnrB r 39.3 bii). Me h r 110 bii i ivee
i e ee by he cmmeci bk e. ove 72%
of commercial banks’ credit ows against xed assets.
fige 2: Mke he ei eig (%),
mi-Jy 2010
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Source: Economic Survey 2010/11
a he g meic c (Gdp),
ei, cei (icig cim gveme)
ive ec cei e 51%, 54.9% 43.6%,
eecivey (ne r Bk, 2011). pe e
ei mi-ai 2011 w r 20,100 e
e w r 19,000 (Miiy fice, 2011).
Cmmeci bk’ ei iee e ge m
2-12% 7-18%. Iebk eig e ge
bewee 10 14%. righ w, he iee e,
which i he ieece bewee eig ei
e, i high. the wie i i, he me wime
he e BfI. likewie, he high ie-bk ehw h he bk hemeve e ec e
mey ech he. sme he BfI e ye mee
he evie ci eqcy i, which i he i
bk’ ci i ik, i by he nrB, keeig
i mi hei iceig vebiiy exceive
exe j ew ec (ne r Bk,
2010b).
BANkING TRoUBLeS SImPLIFIeDWih i icee i ei be
and diversication of investment portfolios, the gwh i he mbe BfI e ch
cmeii i eicig ei (iii,
gveme iivi) bwe. Bye by
iig emice, he me wee iceivize
ei ch high iee e he h kig
eive ce iveme, which i ckig igh
w e iic ibiiy vi -ecmic
ci.
Mewhie, he BfI cie ey e ee
hig ec bwe wih eig hei
cciy h iee ici yme i
ime. I e i ie i em e ee
hig cci i b e eci
i ice. Whe he bmy high ice e
, he bwe wee be y bck iee
ici i ime, eig h iqiiy i he
bkig iy.
simey, cegy B, C d1 BFIs were nding it
h bw me m cegy a BfI bece he
ie-bk eig e w m bve he vege
BfI’ m eig e. We, me BfI hve
ee egive i e mey BfI which
hey hik e he vege ce. the iqiiy
cch w, mi exe, cme byhe gveme’ ibiiy mbiize eveme
exeie, he big iii ei’ ecii
to pull out mature deposits from edging BFIs, and a
ww i ei gwh e.
the cmbie eec hee c hi h bk
ch Vib h h bi exe ew
ec, cmeig hem eek nrB’ ievei. I
effect, there is a serious erosion of condence on the
bkig yem, ge i em cmmiie
ike g ive.
TWo BUBBLeSBy vekig he ee hvig imie mbe
of BFIs, the evolving depositor base, and nancial
eei ve he ye, he nrB e my BfI
. I cee BfI bbbe. thi w we
by iee cmeii y bewee bk i
he me cegy b bewee BfI i iee
cegie, eig im w i eig high
ei e eig wih ieeiig mke,
products, and borrowers’ creditworthiness. It reected
b ce gvece, ck ivi
r&d i he ec. the eig eig ge i eee hig mke y wee hei
ice, eig e ee hig bbbe.
cAUSeS oF LIQUIDITy AND BANkING cRISeSthee hve bee mieig icg gme
oating around about the causes of the ongoing liquidity
bkig cii. they e me by kehe wh
1 Category A, B, C and D means commercial bank, development bank, nance companies, and micro-nance development banks.
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i ee hw hei vee iee icmeece
i jeizig he e he bkig iy, i
eiy eiig ey be ecmy.
fi, bke bieme e gig h eye
bge ibeme eveme exeie
e cig iqiiy cii. thi gme e h
mch we. I i e h bge hve bee cmig
e w ye w, hee h bee m
ow of money from the Ministry of Finance and other
Miiie he eecive ce he cy vi
BFIs. This has denitely limited liquidity in the banking
yem. B i i ie i he mi ce. Ie,
i i mi im he iqiiy cii. I ey i
eveme exeie i he ce, he why i
ne hve iqiiy cii whe imi eie
occurred in the past?
sec, he wihw ge m mey by
iii ei, eeciy nrB ne amy,
h icy ece eeve i BfI’, eeciy
cegy B C, v qeeze vibe iqiiy.
thi gi i im he iqiiy bem, i
mi ce. I j by ig ew mii me
ei by iii ei he BfI i
be, he hee i mehig wg wih he wy hey
e ig bie. I i bke’ icmeece
ibiiy BfI.
thi, whie me ge h ee e eihe hig
mey hme e iveig i cmmiie ike g
ive, he e h he cmi ivge
ce icme ci bve r 1 mii i
eicig ei. agi, bh e he e ce,
b im he iqiiy cii. thee gme
e mee by cei bieme wh e i
ivgig hei ce icme iy y xe
he gveme.
fh, me ge h ecie i eeve, eciey
mey be (which i eq cecy i cici eeve bk he i ce bk), e
ww i gwh emice, e ii
whee cei gwh w highe h ei gwh.
they e h i i eig i iqiiy cii,
e m, he nrB h che b
ey bi we ch eeve i he
ey high ci eqieme ( which wi he
icee iqiiy). o he gme, hi h me
h. B iceig iqiiy wih cecig he
ie mke w y e he ievibe.
the mi ce i h ne h my BfI ceig
to too few customers (note that a 2006 study on nancia
eei hw h y 26 ece heh
i ne hve bk cc (fei, Ji, & rj,
2006)), meig h i e vive mee
ever-increasing prot targets, the BFIs have to have
constant ow of money from all sources, that also in
higher proportion than previous ows. The competition
to attract deposits and give out loans intensied with
he icee i he mbe BfI, wh cmee
wih mch c mke ieeii.
Wih cieig ei hei biiy
fulll demand for withdrawls, the BFIs lent unsustainabl
amount of loans to earn quick returns to meet protge bee he gee meeig hehe
iec. thi e i e ee
hig ec bbbe, which cke i mch r
110 bii cmmeci bk’ ei.
Buoyed by easy nance and loans, real estate
ci hig cmexe e iy.
Sometimes articial demand was created just to jack
ice. thi i evie m he c h hky
ecmic me jiy mi icee
i ice i me y. Meve, mey i
me i hi ec wih ey eig ik he biiy bwe ey . the BfI e
hy iigihig bewee m bm
. thee i ie c mke ieeii
thi w ge by nrB’ ey mey icy,
lax supervision (by near-retiring ofcials who had
execi mvig i ive ec bkig)
inow of remittances, which is approximately one-fourt
Gdp igh w.
thi cee mke ieqiibim, i.e. he y
e ee hig cmexe ie em,
eig ecie i ice by mch 30 ece. aice ie, bwe e wi be be h
ici iee yme ime, cig he BfI
ece viby icee eig e.
thi i e i eig bye cceig
bkig eve e yig he miimm eqie
w yme. s he mj b cee wi ee
‘gh’ me, i.e. emy me wiig
cme eihe by e hem. thi wi ime
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hi he BfI eve he e i ge me
ecig cii.
WeRe We WARNeD?Many nancial and economic analysts failed to perceive
he i chge heig i he bkig ec.
simiy, bie ji ey ie eve e
ce be ig me h ece g whe
he w iqie ne deveme Bk (ndB) w
e mgeme eview, whe he mbe
BFIs increased multifold in a matter of just ve years.2
I migh be iig bece mjiy bie
ji i ne cy hve iig i
ecmic bie. they ke -he-jb iig
bie eig e behi he cve i
hmig he ecmic me be.
th beig i, me beve, ji, y,
bke i eceive he mig cie. the
wig be g whe he ie wi ee
exceive -emig BfI e
i 2006.
movING FoRWARDthe nrB c y ch c--me
gme ech ime he BfI ieiby icee cei
wih eig he ceiwhie bwe
hei ei gwh.
The repeated introduction of renancing facilities will
eve he ece bem. I wi y ee he
ievibe ecig he eie bkig ec.
Mewhie, e wy he he, he c ch
renancing facilities will have to be paid by taxpayers.
I i m biig be BfI wh g
i he me e hei w icmeece, e
he bic’ eie wihw ei ive
i cmmiie ike g ive, be. thee
i bem m hz i he BfI, i.e. hey e
recklessly lending to earn quick prots and by knowing
h i hey g bey , he gveme wi bi hem
.
f he h em, he nrB h e i
icee iqiiy h xi ei e
cme w. thi h be we by ccee
e cie bkig yem. the nei
bkig iy h g bck igy, which i
chceize by ew bk b my ei
bwe mke ce, i hig e ge m.
International nancial experience shows that few and
g BfI wih igh evii e e cii
prone nancial system (Allen, 2011). Few but strong
BfI wih igh evii w e eci i
eig exee, hehy cmeii, ecmic
ce ivi i he bkig iy.
f g em i, ne h hve mehig
ike “Troubled BFI Relief Program”. I c be
we by wihi nrB whe mi e w
be ece ece be BfI h he
bem i yemic, ei e ice BfI. I c be give he hiy e
e, chge mgeme, ce mege cqiii,
h he mjiy he be BfI i
hey e hehy e. I w cie
he bkig ec, eiy e ewe b
hehie BfI h e ivive i viig evice
he bic, ke exceive ik ei he
eie ecmy.
I be BfI eek he m he nrB he
gveme, he hey h be iece e he
ciiie vie hgh hi gm. Whe hey ,hey h be ce eg c chge.
the gm c hve hiy e e, chge
mgeme, ce mege cqiii, h
mjiy he i i e hehy e,
mg he mee e he BfI kck i
ice.
a gm ike hi e i eee bece he nrB c
simply extend loans and renancing facilities at the
exee xye’ mey by iceig mey
y ech ime BfI ge i be. Mewhie, he
BFIs also cannot inict damage to third party due to their
w hcmig. thi c be eme i
he ecig bem. I h g he BfI
bkig yem e cee. le i c be
give me eeh ch eviy viy e i
ne-tuning of banking sector.
2 see sk, 2009; sk, 2009b; sk, 2011; sk, 2007 he ici he eveme i he bkig iy.
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