Challenges facing banks in 2011

KATHMANDU, JAN 01 -
Never before had the country’s financial industry faced challenges such as liquidity crisis, inflated interest rate, declining deposits and danger of real estate collapse at once


The year 2011 might be a one for the banking sector as to whether to head towards more crises or revival.

The entire banking sector is coping with multiple challenges—liquidity crisis, inflated interest rate, declining deposits and danger of real estate collapse.

Never before had the country’s financial industry faced such multiple challenges at once, let alone the problem of Nepal Bank Limited and Rastriya Banijya Bank both of whom turned sick about a decade ago. Will the banking sector overcome these challenges in 2011?

From the look of things, the liquidity problem that started in the second half of the fiscal year 2009-10 is not going to be resolved any time soon and this is reflected in the inter-bank lending rate which stands at around 10 percent.

“The banking sector will continue to see tight liquidity for a few more months,” said Maha Prasad Adhikari, newly appointed deputy governor of Nepal Rastra Bank (NRB). “Increased government expenditure in the coming months will give some relief.”

The main source of liquidity in the banking sector is deposits. But, commercial banks have failed to attract depositors despite offering high interest rates on deposits.

NRB, in its report on the macro-economic situation of the country, has said that the diversion of deposits from commercial banks to class B and C financial institutions is the main reason for deposits declining in commercial banks.

According to the report, bank deposits declined by Rs 4.5 billion in the first four months of the current fiscal year. Deposits in commercial banks stood at Rs 622 billion as of Dec. 24. Development banks’ deposits rose by 63 percent to Rs 77 billion and finance companies saw their deposits grow by 35.08 percent to Rs 77 billion in the last fiscal year.

However, bankers don’t agree with the central bank’s claim. “Deposits have not diverted, only the money in the informal sector went to other financial institutions,” said Sashin Joshi, president of Nepal Bankers’ Association (NBA). “Until the provision related to capital gain tax and anti-money laundering is relaxed, deposits are not going to come to the banks.”

Nepal Investment Bank Chairman Prithvi Bahadur Pande believes that capital flight is one of the reasons for the sluggish deposit collection of banks.

Another challenge for the banking sector in 2011 is recovering loans given to the realty sector. After the central bank capped bank loans for the realty sector in the second half of the last fiscal year, realty transactions have nosedived. The central bank has confined lending to the housing sector to 25 percent and realty to 10 percent through the monetary policy.

“With realty prices starting to come down and possibility of real state collapse not ruled out, those having taken loans in the speculative market may default,” said Joshi. “Defaults may go up in the third and fourth quarter of the current fiscal year.” As of the first quarter of the current fiscal year, bank lending to the realty sector stands at about Rs 100 billion, with Rs 65 billion in land alone.

Another challenge facing banks is to maintain profitability. Banks’ net profit shrank to Rs 3.46 billion in the first three months of the current fiscal year from Rs 3.80 billion in the same period last year, according to banks’ quarterly financial statements. “Profits of banks will come down in the new year due to narrowing margin and intense competition among BFIs,” said Joshi.

Bankers are arguing that the recent guidelines on service charge forced them to increase interest on loans as the guidelines tell them not to keep more than a 2 percent difference in the interest rates on different deposit schemes. This means they are compelled to increase interest on normal deposits and subsequently increase interest on loans.

Pande of NIBL said increasing interest on loans is not the solution for profit maximisation. “Borrowers do not come to the banks if interest is increased heavily,” he said. “Therefore, it is better to go for reducing associated costs.”

Despite these challenges, there is scope for mergers and acquisitions of BFIs in 2011. In order to encourage mergers and acquisitions, this year’s budget has removed the existing provision of taxing assets and liabilities as disposal after merger.

The central bank is also planning to offer policy relaxation to encourage mergers. “We will provide policy relaxation to BFIs willing to go for merger in all possible areas without compromising risks of banks,” said deputy governor Adhikari. It means there will be no relaxation in cash reserve ratio, liquidity prevalence and capital adequacy ratio which are related to risk. “However, there might be some relaxation in areas such as branch opening and giving more time to settle the ownership patterns after merger,” added Adhikari.

NIBL chairman Pande is hopeful that those banks facing much pressure would opt for mergers. “It is high time for the Nepali banking sector to consolidate,” he said. “I hope the merger process will begin in 2011.”

Joshi, however, said many BFIs may mull merger if the government gives concession in many areas including corporate tax, which

is currently 30 percent of the net profit.



PRITHVI MAN SHRESTHA ,Posted on: 2011-01-01 09:03
Source: http://www.ekantipur.com/2011/01/01/business/challenges-facing-banks-in-2011/327383/