Seven years of liberalizing financial sector

Nepal fails to welcome even a single foreign bank

Published On: January 3, 2017 11:20 AM NPT By: Sagar Ghimire  | @sagarghi

Analysts say lack of business holding foreign banks back
KATHMANDU, Jan 3: Even though it has already been seven years since the government opened doors for foreign banks in the Nepali financial sector, not a single such bank has opened its branch office in Nepal.

In line with the  commitment  made  by Nepal under  the financial  service  sector  of  the  General  Agreement  on  Trade  in  Services  while  joining the World Trade Organization (WTO) April 23 2004 as the 147th member, the Nepal Rastra Bank (NRB) had decided to allow foreign bank and financial institutions to open their branches in Nepal. But not a single foreign bank or financial institution has shown interest to enter the Nepali financial market.

Analysts say that less returns compared to the investment they are required to make to enter Nepal is keeping away foreign banks and financial institutions from expanding their business here.

A foreign bank must have a capital of at least US$ 20 million to open its branch in Nepal, according to NRB requirement. 

Branches of foreign banks in Nepal are allowed to do only wholesale banking transactions. 

Realizing the importance of Chinese bank and financial institutions to provide financial intermediary services in Nepal in the wake of rising trade volume between two countries, NRB officials have requested Chinese banks to come to Nepal to open their branches. However, they are receiving lukewarm response from the banks in the northern neighbor.

"We have been looking for Chinese banks in particular and other international banks in general to come to Nepal. We had even sent a letter to a Chinese bank, requesting it to come to Nepal. The bank had replied to us saying that it would respond after studying the possibility,” Narayan Prasad Poudel, executive director at Banks and Financial Institutions Regulation Department of the NRB, said. “But, we are yet to hear from it.”

He also told Republica that a delegation of Chinese businessmen that visited Nepal recently had inquired about the legal process of opening branch offices of Chinese banks here.

Apart from providing financial intermediary in the Nepali economy, the entry of foreign banks in Nepal also means technological transfer, greater level of service choices to consumers and higher levels of financial flows through access to foreign capital. The  interlink  of  domestic  financial  system  with  global financial intermediation, facilitation of  capital  formation  and  assistance  in  domestic  economic  growth  and  development are the other benefits of the presence of foreign banks in Nepal, according to financial analysts.

Banking experts say that the foreign banks are not tempted to enter Nepal as they do not see returns compared to the huge cost involved while opening a branch office here. 

Krishna Bahadur Manandhar, former acting governor of the NRB, told Republica that the country opened the door for foreign banks only to fulfill its commitment that it made while acquiring WTO membership. 

"We were asked to do so during the WTO negotiation. It would be naive to expect foreign banks to come Nepal for just wholesale banking business since they are not allowed to do retail banking," Manandhar, who was a deputy governor when the NRB decided to grant license to foreign bank, said.

According to financial analysts, many foreign banks could be reluctant to come to Nepal as they feel doing business in countries like Nepal, where they have to maintain strict regulatory compliance and rigorous prudential requirements with respect to anti-money laundering and combating the financing of terrorism and tax transparency, very risky. 

Anil Keshary Shah, president of Nepal Bankers' Association (NBA), told Republica that the reluctance of foreign banks to enter Nepal can be attributed to political instability coupled with low business scope in the country. "The country was mired in political instability for many years and there was no development that could have generated business of mega scale for foreign banks to come to Nepal.

They did not see opportunities here while countries like India and others went forward in the economic path where they see a lot of opportunities," said Shah.
There are, however, hopes that foreign banks will now enter Nepal. 

"The political environment is improving with the promulgation of new constitution and there are mega scale infrastructure projects where they can come and do wholesale financing," he added. 

Unlike domestic banks doing retail banking, the office of foreign banks in Nepal cannot mobilize deposits below Rs 100 million and float loans below Rs 300 million. 

NRB Executive Director Paudel said that the central bank was flexible to review conditions and requirements for foreign banks to come to Nepal, except the condition of wholesale banking. 

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