So, the question that comes up is: Are the old ways of doing things better? One argument that has been put forward is that regulators should discourage complex products and keep ‘things’ simple. Given the collective heart attack the banking collapse gave the world, the validity of this school cannot be undermined. Notwithstanding that, there is no denying that innovation in every field and development has changed the way in which the world works.
Deregularization of banking sector in Nepal and the advent of technology has greatly changed the way banking is done. Even without much statistical support, I can safely say that even in economically nascent country like Nepal, banking has come a long way. My father’s generation worked for their good part of their life and bought a house during their mid-age using the earned income. A mortgage was unheard of then. Collaterizing your house to a lender was close to taboo. In my generation, we leverage our future earnings and buy a house and pay interest on the loan and a portion of the capital from our future earnings. ‘Telex transfers’ had to be tested and verified then until SWIFT was introduced.
A credit or a debit card was not heard of nor did ATMs adorn the streets of Kathmandu. My father used to send money to me in India through TT or drafts; now the students carry a Visa debit card. Banking used to be simple in those days. You deposited money with the bank for safe keeping and the bank paid you interest. The bank lent the money of depositors to borrowers who used it to build their business and in return pay back the bank with the principal plus pre-agreed interest. The interest spread allowed the banks to pay its staff and give the investors a return on their investment.
Today, the banks have been increasingly focusing on the non-funded income as they are less capital consuming (though capital adequacy has not been one of the main constraints for the Nepali banks). Banks are vying for a bigger share of remittance, LCs, guarantees, transaction banking and treasury business. Some of the progressive banks are now selling bancassurances, innovative transaction banking product suits, etc. Some avant-garde banks are even lobbying for derivative products – the development and complexity of the latter being the epicenter of the global crisis.
During my childhood years, a ‘license’ from the government was required to import (sounds strange now). It is not imprudent to expect full convertibility of the Nepali rupee and this can bring a lot of upheaval – good or bad to the economy and the banking sector. A full convertibility can integrate the Nepali economy fully to the world economy, thus bringing both opportunities and threat. The banks in Nepal will then have a full array of banking product suits from complex investment products to potentially highly-volatile derivative products that can be offered. Innovation, complex products and unbounded possibilities will emerge. Even with the limited scope available, the Nepali banks have come a long way – simply compare the simple saving accounts offered by public sector banks 20 years ago and the array of deposit instruments available now.
Are the old ways of banking better? One argument that has been put forward is that regulators should discourage complex products and keep ‘things’ simple. Given the collective heart attack the banking collapse gave the world, the validity of this school cannot be undermined.
Due to limited investment opportunities, slow economic growth, competition and growing share of inward remittance business, it is not surprising to see that Nepali banks have increasingly focused on transaction banking, particularly retail transaction services. This led to the rush in opening of branches followed by various products like mobile banking, SMS banking, online payments, use of biometric technology, etc to tap possible market opportunities. Banks have tied up with retail agents for collection/payments in rural areas where banks are yet to reach. This has been possible due to technology, which has allowed banks to create a market that did not exist earlier. Yet, the advent of technology has added complexity to transactions and banking. Earlier, payments were made either in cash, checks, money orders/drafts. Now, through the use of technology, a seemingly impossible transaction few years ago has become possible.
Indeed, technology in the banking sector has opened avenues and opportunities, in the process creating value for both sellers and buyers. Yet, it cannot be denied that a good share of blame for the financial meltdown in the US can be attributed to technology. Technology allowed the financial institutions not only to innovate but it brought in a cloud of almost impenetrable complexity. This allowed the bankers to take bad judgments and excessive risk-taking spurred by greed and dishonesty. The regulators, meanwhile, could not keep pace with the development and innovation and it created a situation wherein no one could stop the financial avalanche.
In one of the guest lectures I took on Credit Default Swaps and how it fueled the financial crisis, a student asked me if credit derivatives were good or bad. And the answer to that was: “Like everything, it is a double-edged sword.” Credit derivatives in concept is a good product to transfer risk in mutually-beneficial trades until the lid blows due to over trading supported by little or no regulation. Likewise, innovations can bring in benefits, yet at the same time it can create complexities, thus requiring a robust system.
Indeed, Nepali banks have come a long way. The developments and the banks’ appetite for creating a niche market are appreciable. The people at large have benefitted from these developments. In the backdrop of these developments are electronic advancement and there needs to be robust financial infrastructure to manage an array of risks that these innovation generates. It is imperative that the regulators understand where the market is heading and are prepared for the future challenges. The regulators in most countries are an intelligent lot but are unfortunately often bogged down by the bureaucracy and thus lag behind. Regulatory agencies need to promote an innovation-enhancing financial regulation and be at the forefront of development.
Perhaps, Leonardo Da Vinci was referring to thoughts and not products when he said: “Simplicity is the highest form of sophistication”.
Michael.Siddhi@BMIBank.com
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