Dr Sabita Bhandari
Rastriya Banijya Bank
Asst. Manager
The banking industry is the most crucial part of the financial system (Geršl and Heřmánek, 2008). It plays a critical role in economic growth at firm, industry and macroeconomic levels (Mittal and Garg, 2021). The history of banking has demonstrated that this sector is vulnerable to several risks and instabilities, and perhaps it is the only sector of an economy where several risks are managed jointly (Cebenoyan and Strahan, 2004). Over the last few decades, notable developments have taken place in this sector regarding deregulation, innovations, diversification, competition and financial globalisation.At present, the reach of the banking industry has expanded across the globe; consequently, it has become more inclusive, vibrant, and dynamic. The increased financial globalisation has enlarged the financial market opportunities many folds; however, it has also enlarged the magnitude of risks and instability concerns. In the last two decades, the issue of bank stability has become very crucial, and especially after the Global Financial Crisis (GFC) of 2007-09, it has gained widespread attention from researchers and policymakers. Regulatory authorities worldwide are increasingly paying attention to macro-prudential norms to maintain stability in the financial systems. Further, in the present times, when the financial systems are interlinked across the globe in a very complex way, instability in the financial systems can do colossal damage to the world economy.The GFC has established that neither price stability nor traditional macroprudential regulations are sufficient to maintain financial stability (Mendonça and Moraes, 2018). Central banks worldwide have acknowledged that financial stability has equal relevance, along with inflation control and economic growth.This history of modern banking system in Nepal is very new one. This becomes explicit when one competes Nepalese banking system with the banking systemof other countries of the world. But this does not mean that there was the complete absence of banking activities in Nepal. The banking in the form of money lending can be traced back in the period of Gunkam Dev toward the end of eight century. According to the historical evidence in 723 A.D. Gunkam Dev the king of Katmandu had borrowed money to rebuild (Dahal, 2037, p.31). Toward the end of fourteenth century at the period of Jayasthiti Malla, a special class of people named ‘Tankadhare’ used to deal lending activities of money. Another historical example as to the pre-modern banking system is found when Rana Priminister Randip singh was administering Nepal in 1880 A.D. During his regime one financial institution by name Tejarath was established to give loan facilities to the government staff and offered loan facilities tot the public in general in the term of 5% interest (Shakya, 2040, p.40). The bank of England was founded in 1694 by a number of merchants of the city of London for the purpose of lending money to King William 3 rd who required financing his military activities on the sentiment of Europe. After 57 years, a merchant, 15 Shankhandhar interpreted Nepali sambat by clearing the public debt. These instances reveal that money lending was prevalent even before 8th century.
Nepal is an emerging economy, and similar to other emerging economies, the financial sector of Nepal is bank-dominated. The capital market of Nepal is underdeveloped, and the Nepal Stock Exchange Limited is the only Stock Exchange of Nepal. Hence, the banking sector of Nepal plays a major role in financial inter mediation. Commercial banks in Nepal are growing at a significant pace, and they play a significant role in the Nepalese banking industry . At present, the banking sector of Nepal is facing various challenges in terms of mounting NPAs, the concentration of the lending to few sectors and flawed credit screening and amidst these challenges, some banks have already failed during the last few years and faced liquidation (Sapkota, 2011). During 2001, Nepal bank limited and RBBL faced huge NPA problems, which impacted their performance considerably. Studies have shown that deprived credit appraisal and excessive exposure to the real sector are some of the key factors responsible for mounting NPAs (Sapkota, 2011). The Nepalese economy experienced three years (2017-2019) of strong economic growth of an average of 6.5 percent; however, in the year 2020, this trend reversed amidst the Covid pandemic (Nepal development update, July 2020). Given the role of the banking sector in Nepal and contemporary industry specific and macroeconomic challenges, it is vital to ensure stability in this sector. The crucial role played by the banking sector, especially by the commercial banks of Nepal in economic development, coupled with post-crisis bank stability concerns, drives the key motivation for this study. The present study attempts to assess bank stability and its determinants in the context of Nepalese commercial banks how bank stability of Nepalese commercial banks has progressed during the last few years. How have different dimensions of bank stability impacted the overall bank stability? What determines the stability of the banking sector of Nepal?
Nepal Rastra Bank was established on 26 April 1956 under the Nepal Rastra Bank Act 1955. It marked another milestone history of the banking development in Nepal. NRB, the central Bank of kingdom of Nepal, was established to discharge the central banking responsibilities including guiding the development of the embryonic domestic financial sector. Since then, there has been a huge growth in both the number and the activities of the domestic financial institution. To reflect this dynamic environment, the functions and objectives of the bank have been recast by the new NRB Act of 2002, the preamble of which lays down the primary functions of bank as: to formulate necessary monitory and foreign exchange policies, to maintain the stability in price and consolidate the balance of payments for sustainable development of the economy of the kingdom of Nepal; to develop a secure, healthy and 16 efficient system of payments; to make appropriate supervision of the banking and financial system in order to maintain its stability and foster its healthy development; and to further enhance the public confidence in Nepal’s entire banking and financial system (NRB. htm, 2006). In a view of the various development programs launched after the beginning of planned development in the country, government established another commercial bank, Rastriya Banijya Bank in public sector on 23 January, 1966. Two commercial banks NBL and RBB were functioning under two different acts. So, it was felt necessary to introduce a new commercial banks under the same policy and rule. On 2031 B.S. commercial bank act 2031 and Rastriya Banijya Bank act 2021 B.S. were amended and introduced new commercial bank act 2031 B.S. After then NBL and RBB are functioning under the commercial bank act 2031. In 1963 AD a co-operative bank was established that was converted into Agriculture Development Bank in 2024 B.S. to be the main financial institution for small rural, agro-industrial and co-operative sectors. For the purpose of the country, Nepal Industrial Development Corporation was established under the NIDC act 2016 B.S. It was set up with an objective of conducting feasibility study, market survey, financing for the development of the industry etc Due to tough competition, every commercial bank are ready to provide loans in productive as well as unproductive sector in Nepal, specially huge numbers of financial institution provides loans on unproductive sector and ultimately customer or debtors are unable to repay the loan on time so this can be happened due to lack of honesty and integrity of the consumer. Right now financial institution faces huge losses on their lending money and treats it as a non-performing loan (assets)..”A man without money is like a bird without wings,” the Romanian proverb insists the importance of the money. A bank is an establishment, which deals with money. The basis functions of commercial bank are the accepting of all kinds of deposits and lending of money. In general there are several challenges confronting the commercial bank in its day today operations. The main challenge facing the commercial banks is the disbursement of funds in quality assets (loans and Advances) or otherwise it leads to non-performing assets.
Post-liberalization, the number of private sector banks has increased drastically, and their share in the total advances, deposits, and total assets is rising gradually. However, the public sector banks still have a sizeable market share in the industry. As of mid-July 2020, 27 commercial banks were operating in the Nepalese banking industry, out of which three were public sector banks.Due to the upsurge in the banking business, Nepal has the highest financial deepening indicators in South Asia and low-income countries, with more than 100 percent deposit-to-GDP ratio and close to 100 percent credit-to-GDP ratio, like in the advanced economies. This is a result of skyrocketing property prices. The situation in which the general people without city-based property cannot get credit from the BFIs is of concern.There are 21 commercial banks as of 24 February 2023.
Nepal Bankers Association (NBA), an umbrella institution of commercial banks, has been fixing deposit interest rates. The NBA is becoming a platform to exercise power in regulating the interest rate, disentangling the central bank’s indirect measures to pass through short-run interest to the deposit and lending rates. Even if this system might prevent interest rate volatility, the price should be based on the institution’s risk and service quality, which cannot be the same across all BFIs. The regulator should not provide protection against such anti-competitive behaviour. The demand and supply forces should allow equilibrating the market while indirect approaches such as moral suasion may still apply to the regulator.Nepal has an inherited ethical problem of conflict of interest in every public sector, including BFIs, government and politics.
Hence, we need a brutal reformist not just to re-orient legal and institutional practices but also to transform the attitude and behaviour of the public and institutions, which may not be ‘favoured’ by the market initially. The overwhelming mergers amongst the commercial banks show hopes of fair competition in the products and services, but the regulator needs to be ready to counter the ‘too big to fail’ problem and address the concerns of the interest rate syndicate and conflict of interest to ensure macro and micro corporate governance.Bank plays a vital role in developing the economy of any country. The level of over all development of a country i.e. social, cultural, political, technological or economical is characterized by the level of economic growth and the crux of the economic growth lies in the development of well managed and structured banking system. Thus, banks can be considered as the backbone of a country’s overall development or banks can be regarded as the pioneer to create and mobilize the capital, rendering various financial services. Banks have been contributing commendable efforts to establish and develop the industries, trade and commerce in the country.
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