Financial Management (2066Q6) What do you know about the financial sector reforms in Nepal? Highlight the nature, need and implications of such reforms.

Nature of financial sector reform in Nepal

Nepalese economy was liberalized since mid 1980's. Even though, Nepal Bank Limited (NBL) in 1937 was the first bank in Nepal that provided financial services to the general public. Nepal Rastra Bank (NRB), the central bank of Nepal was established in 1956 under the NRB act 1955. Nepal Arab Bank Limited was the first joint-venture bank of Nepal established in 1984, under the Government's liberalized policy. After then, three institutions of diverse nature were established under the full ownership of Government of Nepal. They were Nepal Industrial Development Corporation (NIDC in 1959), Rastriya Banijya Bank (RBB in 1966) and Agriculture Development Bank, Nepal (ADB/N in 1968). Weak supervisory and policy measures failed to address the fundamental problems of three state-owned banks (NBL, RBB and ADB/N). So, it is realized to revitalize, reform and modernizing the financial sector because a large pie of the financial sector is accounted by NBL, RBB and ADB/N. The share of NBL and RBB was 43.7% and 39.4% in the entire commercial banking sector deposit and lending activities in 2002.

Need of financial sector reform in Nepal

Organization for Economic Co-operation and Development (OECD) Performance Audit Report  May 17, 1995 concluded the basic causes of weakness of financial sectors as:

a. The lack of commitment by the Government

b. No significant changes in the managerial culture to ensure professionalism, autonomy and accountability

c. Fundamental reforms to achieve a major improvement in financial and operational performance of the banks were not specified

Similarly, KPMG/Barents study 1999/2000 was performed to find out the actual position of NBL and RBB

a. Bank's management basically dysfunctional (बेकार)

b. No reliable data on loan portfolio

c. Financial accounting is primitive and not in international standards

d. Business strategies are not in place

e. Human resource policy is weak and counterproductive

f. MIS and record keeping are very basic

g. Governance and management are politically driven

Implications of financial sector reform in Nepal

To develop a healthier financial sector in Nepal, the Second Financial Sector Restructuring Project (SFSRP) was approved by World Bank board by March 9, 2004. The four components of this project are:-

1. Voluntary Retirement Schemes

2. Hiring of Sales Advisors

3. On-going Nepal Rastra Bank Re-engineering

4. Management Team Support

After completion of this project, right now the current status of NBL and RBBL are as follows:-

NBL

• It is under the reform program since 2058 Chaitra 1st
• It consists 116 computerized and network branches
• 2790 employees as in 2069 B.S.
• Issues 1:9.5 right shares to comply with the capital regulation for commercial banks
• Government's proportion in right share amounting to NPR. 1392.4451 million has already been received

RBBL

• Professional management team started to work since Jan 16, 2003
• 141 network branches having Pumori III CBS System
• 2600 employees are working
• Recent capital adequacy ratio is -2.44%
• Government's proportion in right share amounting to NPR. 1392.4451 million has already been received