It is always difficult to pinpoint how many banks a small economy like ours actually needs because of the lack of a universally-accepted scientific theory on the issue, not to mention other factors like geographical complexities and literacy rate. We have heard professional organizations like Nepal Bankers’ Association arguing that the existing number of licensed financial institutions, which is over 200, is too much for an economy which is just worth US$12 billion. However, they have not been able to explain categorically whether or not the expanding number of banks is negatively affecting our economy.
Frankly, so far, the expansion of the banking industry ever since it was opened for private players over two decades back hasn’t produced any negative effect. The overall profit of the banks is rapidly growing, more and more branches are being opened -- implying banking services are expanding and employment is rising -- while interest rates in deposits are going up. All this reflects that there is perfect competition in the sector. Having said that, we are not of the opinion that every wealthy businessman wishing to open a bank should be allowed to do so.
Past incidents clearly show that extra precautions should be taken while awarding licenses to run institutions that mobilize public funds. We have had enough bitter experiences from banks run by notorious bankers with nefarious intentions. One other lesson that we have learnt is that it is not just the financial health of the investor that should be taken into consideration; track record of major investors should also be given equal consideration. The hue and cry seen during the near collapse of Nepal Bangladesh Bank some two years back and recent liquidation case pertaining to Nepal Development Bank speaks clearly that the collapse of a bank has far-reaching ramifications.
A collapsing bank brings with it a series of complicated economic as well as social consequences because in the process innocent citizens quite often lose their lifetime’s savings. Hence, it is good that the central bank is soon initiating an in-depth study to help it to adopt a long-term banking license policy while embracing measures to enhance its supervision capacity.
Related story
SEBON grants broker license to 11 more companies
