INSIGHTS ON NEPALI BANKING SECTOR
Conclusion and Recommendations Overall, through our primary and secondary study, conclusions about the state of competition and collusion in the banking sector of Nepal can be drawn. The banking landscape is governed by the NRB, which, in comparison to institutions in other sectors of the economy, is considered to be one of the most powerful institutions in the country; NRB holds the authority to enhance the competitiveness in the financial sector; however, this authority has not been used to optimum capacity. Views have been expressed that NRB has a tendency to micromanage the banks by levying more than necessary restrictions and regulations upon commercial banks and curbing potential competition. Similarly, through media house reports and their coverage, it can be seen that there exists a high possibility of an informal agreement between the bankers regarding interest rate fixing. Banks have been allegedly engaged in collectively determining the interest rate due to various reasons revolving around ownership of conglomerates in commercial banks, lenient regulations, and easy workarounds. A syndicate-like behavior exists also because of people in power taking undue advantage of their positions, associations focusing on frivolous matters, and commercial banks fearing being outcast from facilities like interbank lending. Additionally, possibilities of collusive behavior were observed in other avenues like financial reporting, consortium lending, offering of homogeneous products, and operability of the banks. The comfortable status quo for commercial banks and the informal “gentlemen’s agreement” can be factored in while considering why innovation is stifled and why products offered by financial institutions in Nepal are rather traditional. The study has highlighted that NBA is in a vantage position to play a more proactive role to uplift the banking sector. An association like the NBA is valuable in spreading awareness, lobbying, and consulting while formulating policies. For the government, approaching the NBA while formulating policies or facilitating dialogues is easier than going to banks individually. Though the NBA has endeavoured to foster the growth of the banking sector, more could be achieved if it were to be engaged in promoting and ensuring sound and healthy competition amongst the banks that not only drive the banking sector but also economic growth. Policies towards enhancing efficiency and innovation and promoting the welfare of the general public and the economy should be promoted. The collusive behavior portrayed by commercial banks has decelerated the economic development of the country. It has impacted the entire banking sector, SMEs, the general public, and the economy as a whole. The “you scratch my back, I scratch yours” scenario caused by banks lending favours to one another has resulted in smaller banks and/or smaller creditors paying higher interest rates while availing credit facilities. Likewise, the banks also need to engage in practices like ever-greening of loans and loan shifting to maintain a sound balance sheet, exposing banks o higher risks. However, such behavior is the most detrimental for the general public who are left at the mercy of the commercial banks and will end up facing volatile deposit rates based on the liquidity requirements of the bank. Views were also expressed that such syndicate-like behavior further discourages the development of alternative markets like the fixed income/bond market and private equity/ venture capital market as prominent businesses do not see the need to expand their financing options.
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