World Bank recommends having fewer than 15 banks

Published On: September 15, 2019 09:47 AM NPT By: Republica  | @RepublicaNepal

‘Hike paid-up capital to Rs 16 billion in medium-term horizon’

KATHMANDU, Sept 15: A recent report of the World Bank has recommended the government to further consolidate the banking sector to enable it to finance large-scale infrastructure projects in Nepal.

The report also opines that that lowering the number of commercial banks to fewer than 15 will help in developing the domestic banking sector’s capacity to finance infrastructure projects.

Concluding that Nepal’s domestic banks and financial services institutions are fragmented, subscale, and constrained in their capacity to finance, the new World Bank report also said that reducing the number of commercial banks from 28 to fewer than 15 would start to reshape the sector and provide banks with scale and efficiency to deliver consistent loan volumes.

The report ‘Nepal Infrastructure Sector Assessment’ released by the World Bank on Thursday coinciding with two-day-long ‘Nepal Infrastructure Summit, 2019’ organized jointly by Confederation of Nepalese Industries and Ministry of Physical Infrastructure and Transport assesses the energy, transport, and urban infrastructure sectors and highlights private sector solutions for sustainable infrastructure development.

Lowering the number of commercial banks to fewer than 15 features in the report as a recommendation for the government as a short-term priority action (up to three years).

The domestic banking sector could also help in meeting the finance gap in the infrastructure sector, the report said. However, it requires consolidation to enable more efficient deployment of capital.

Not only the mismatch in the asset and liability makes it difficult for banks to lend in long-term 

infrastructure projects, it has also been making interest rates volatile in the market.

“Due to an asset-liability maturity mismatch, banks have limited ability to lend in the long term, as evidenced by the 5-to-10-year average tenure of a term loan,” read the report. “Bank lending is further limited by high collateral, considerable sponsor support requirements, and a lack of experience and capacity in structuring, assessing risk, and (leading) financing initiatives for limited-recourse financing,” the report added.

The total assets of the financial sector stood at Rs 3,137 billion (US$30.46 billion) as of mid-October 2017, according to the World Bank report. Commercial banks account for 86 percent of the sector’s assets. As of the end of 2017, bank credit to the private sector equaled 77 percent of GDP, significantly above the South Asia’s region’s average of 47.6 percent of GDP, according to the report.

While the banks’ credit in Nepal is relatively higher compared to other South Asian peers, they are constrained by the asset-liability mismatch and other regulatory constraints to underwrite loans to large projects, according to the report.

“The balance sheet size of commercial banks needs to increase to enable them to offer sensible loan volumes to support the infrastructure sector,” read the report.

The World Bank report has also said that the further consolidation should be encouraged over the medium-term horizon along with partnerships with inter-national banks to achieve up to 10 local banks. This can be achieved, the World Bank report suggested, by increasing the paid-up capital to over Rs 16 billion. Currently, a commercial bank is required to have a minimum paid up capital of Rs 8 billion.

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