People who don’t trust govt are not depositing money What is the current situation of the banking sector?

KATHMANDU, APR 27 -

The banking sector has been facing a liquidity crunch for a long time, and it is unlikely to be resolved as long as there is political uncertainty. Cooperatives have emerged as an alternative sector for banking with an abundant deposit base. People who don’t believe in the government’s intentions and don’t feel secure with the government policy are not depositing money in the banking sector. The policy regarding anti-money laundering also prevented many people from depositing money in banks. Although the liquidity crunch has eased somewhat recently, it is still far from being over. The inter-bank lending rate of over 12 percent shows a continuous liquidity crunch.


How effective has NRB’s role been in addressing this situation?


The central bank has done whatever it can to ease the liquidity crunch. It has been injecting liquidity through repo because of which banks have been able to operate. Although the government had promised to bring an anti-money laundering policy on the basis of negative list (declaring the amount was not earned illegally), the policy requires depositors to declare the source of income. In such a situation, the central bank can’t do anything.


Have recent incidents of liquidation and declaration of some financial institutions as being crisis-ridden reduced public trust in banks?


Following the declaration of Gurkha Development Bank as being crisis-ridden, banks attracted some deposits from there. I don’t think people don’t have faith in banking institutions. But they don’t have trust in the government’s policy and they are avoiding depositing money in banks. The problem of governance would not have been a big one if the central bank had not provided licenses on the basis of political pressure. Whoever had money opened banks without going through a rigorous fit and proper test and showing source of income, and the problem of governance has appeared now.


As banks are finding it difficult to increase their paid-up capital, will they go for mergers?


I don’t think banks will opt for mergers in the current context. As long as the government gives certain tax exemptions, I don’t think banks will be attracted to merge.

Posted on: 2011-04-27 08:53
http://www.ekantipur.com/2011/04/27/business/people-who-dont-trust-govt-are-not-depositing-money-what-is-the-current-situation-of-the-banking-sector/333146.html