World Bank's recommendation on fewer banks 'lacks logic'

Published On: September 17, 2019 05:47 AM NPT By: Republica  | @RepublicaNepal

KATHMANDU, Sept 17: A recent World Bank report recommended that the government further consolidate the banking sector and lower the number of commercial banks in the country to less than 15.

The report does not, however, make clear on what basis it determined the number of banks that the country needs.

The report 'Nepal Infrastructure Sector Assessment' released by the World Bank on Thursday to coincide with a two-day 'Nepal Infrastructure Summit, 2019' has come up with its recommendation on the number of banks to enable the banking sector to more efficiently deploy capital in infrastructure projects.

But for some observers, the recommendation of Nepal's biggest development partner on the number of banks needed is 'illogical' and 'irrational'.

The recommendation comes in the wake of the government and Nepal Rastra Bank adopting a strategy of lowering the number of banking institutions through the encouragement of 'mega-mergers'.

While NRB Governor Chiranjibi Nepal along with other senior officials of the bank had remarked that the central bank would bring in monetary policy to send the commercial banks into mergers, the central bank later backed out of this tack.

“I do not think the recommendation to lower the number of banks was based on any empirical research. Just because somebody in the World Bank thinks this is the right number and size of banks that Nepal needs and include this in a report, we should not accept it as rationale or justifiable,” said a senior economist.

The economist, who spoke on condition of anonymity, said that the government should not contemplate changing its policies frequently just because this is recommended by international institutions.

“Development partners often come up with their own recommendations without doing any data analysis. Sometimes they think they can write anything in their report for small developing countries. We should reject such recommendations,” said the economist.

The World Bank report is not only for lowering the number of commercial banks to fewer than 15 as a short-term priority measure (up to three years), but also calls for hiking the paid-up capital to over Rs 16 billion. The report also said that further consolidation should be encouraged over the medium-term horizon along with partnerships with international banks, to achieve a figure of some 10 local banks.

According to the economist, the banking sector currently needs policy stability rather than frequent changes in the rules.

“We raised the paid-up capital to Rs 2 billion and then to Rs 8 billion. First, we should see what benefits the hike in paid-up capital has brought? Has the hike really enabled banks to finance bigger projects?” he asked.

Some observers also believe that the government should be cautious about the possibility of market anomaly and syndication that the consolidation of banks may perpetuate.

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