Nabil Bank recently opened four branches in a single day after opening nine outlets in the last fiscal year, while Bank of Asia Nepal opened three in a single day. Other commercial and development banks are also aggressively expanding their networks taking the number of branches to around 700, up by around 30 percent from last fiscal year. [break]
Many call this a natural phenomenon, a by-product of mushrooming growth of commercial and development banks. It´s one of the ways to make their presence felt, they say. But in a small economy like Nepal, with a gross national income (GNI) of around Rs 831 billion, how sustainable is this practice?
Rough estimates say financial institutions need to invest around Rs five million to eight million just to set up a branch. Operation costs in these offices hover at around Rs six million a month.
These numbers may look feeble in front of Rs 9.66 billion net profit made by commercial banks in the first nine months of the current fiscal year, and a deposit of Rs 71.70 billion (up by 16.9 percent) collected by these institutions during the same period. But these figures do not necessarily provide the leeway to overlook the economic history of ups and downs.
In every economic and financial activity, there are periodic fluctuations: At times businesses prosper and boom, but they also go bust. These are business cycles or bubbles and they are self generating.
Financial institutions in Nepal are prospering these days because of the remittance money flowing into the country. This money -- which stood Rs 150.42 billion in the first nine months this fiscal year -- is keeping bank accounts flushed with cash. Most of the banks are also extending their branches just to tap this wealth coming from the Gulf countries, Malaysia and other nations like the US, the UK and Hong Kong. But as the number of financial institutions is growing, their share on the remittance pie is also being squeezed. And if something goes wrong, the haphazardly opened branches are most likely to suffer.
"It´s a ticking time bomb," Sashin Joshi, president of Nepal Bankers´ Association, told myrepublica.com. "It can explode anytime creating huge casualties."
The trend shows it is the newer entrants in the financial market that are aggressively opening new branches.
Sunrise Bank, for instance, has opened 21 branches, while Bank of Asia Nepal has opened 19 branches in less than two years after they came into operation. Other banks like NMB, Global and Citizens have also joined this bandwagon of opening new shops wherever possible. Whereas banks that have been in business for years, like Standard Chartered Bank Nepal and Himalayan Bank only have 13 and 22 branches, respectively.
"Standard Chartered has very few branches because we treat each of our branch offices as profit centers," Diwakar Poudel, head of corporate affairs of Standard Chartered Bank Nepal, said. "We only open branches after conducting proper study on whether they are financially viable. We also look at transaction costs of each deposit we collect and see the returns on each of these transactions."
He said if each branch office fails to operate at breakeven in the first year of operation and if the entire investment that has gone in setting up a branch cannot be recovered within 2-3 years of establishment, the branch may face problems in later days.
The problem created by sprouting of new branches is further aggravated by lack of quality human resources. Currently, there is a gap between growth in the number of banks and their branches and the quality human resources needed for these financial institutions. Therefore, many banks are forced to fill most of their positions with rookies, who do not have any banking experience. The same goes for some of the senior positions like branch managers: They land on those positions without much exposure to banking sector.
"This kind of human power is likely to make more mistakes, such as failure to reconcile the accounts, and at times these slip-ups may go unnoticed," Joshi said. "These human errors can even jeopardize the reputation of the institution.
"It is now time for the banks to focus on operational risks likely to be generated by use of inferior quality of human resources. These risks are as dangerous as investment risks, on which financial institutions have imparted too much of attention. Failure to address this problem can prove to be fatal."
rupak@myrepublica.com
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