The study -- entitled Financial Sector Development and Economic Growth in Nepal: FY 1975 - FY 2007 -- has recommended the government to develop a financial sector master plan (FSMP) in view of medium and long term perspective, pointing to where the nation´s financial system should move so as to achieve broader national interests.
In an astonishing finding, a study carried out by the Nepal Rastra Bank has estimated that over two-decade long expansion of financial institutions in Nepal has made little impact to accelerate growth. Instead, the report has recommended the government to review current strategies and policies to make current financial development beneficial to country´s economic growth.
The soon-to-be-published report urges the government to review the existing linkage between financial sector and economic growth by reviewing current strategies and policies. "In order to enhance the efficiency and effectiveness of the financial markets, the government should seriously think on existing financial environment in terms of determining the measures that have direct linkages on economic activities," the report underlines. “A clear message that can be drawn from this result is the need to enhance tie between financial sector and economic growth by reviewing current strategies and policies.
The report blames weak financial health, especially high Non-performing Assets (NPAs) of Nepal Bank Limited (NBL) and Rastriya Banijya Bank (RBB), country´s two largest banks in terms of deposits, for the country´s weak financial market. "The increasing share of NPAs, in general, indicates that the borrowers were not able to pay back the loan because of the losses in their respective business. The loss in the business having investment in productive sector would mean a marginal or even negative contribution to national output and hence to per-capita output," states the report.
As a result of liberal banking policy that the government adopted after the financial crisis that hit the country in mid 80s, the total number of financial institutions in the country has recorded a dramatic surge to 236. Of the total financial institutions, 26 are commercial banks, while 61 development banks have acquired operating licenses from the NRB. Likewise, the central bank has granted permission to 78 finance companies and 13 micro-finance institutions for banking transactions.
The empirical results suggest that the government should pay more attention to foster and get maximum benefit from foreign trade. “The economic liberalization in terms of increasing volume of trade showed both positive and significant impact on growth -- one percent increase in total trade to GDP ratio has a nearly 0.14 percent increase in per-capita growth," the report states.
Similarly, the report further reveals that the negative impact of population growth has indicated the need to enhance quality of human resource and effectiveness of population control measures.
"The short term measure for this would be to effectively handle the population growth measures. But in long term, the government should find the way to enhance the quality of human resource and make the environment feasible to absorb them within the nation," the report states.
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