Services Trade in Nepal: A Comparative Case
Study of Banking and Insurance Sectors
D. R. Khanal
Institute for Policy Research and Development
Scope of the Study
Briefly assess the liberalization policies perused in the banking and insurance sectors especially since 1990s,
Examine the strengths and weaknesses of the banking and insurance sector liberalization in the light of their contribution in raising efficiency and competitiveness,
Make comparative assessment on the role of joint venture, private and government owned banks and insurance companies promoting business and enhancing access to credit with special focus on gender dimension,
Explore the possibility of enhancing the role of banking and insurance services in the Nepalese economy and chalk out strategies to be appropriate in the preferential trade agreements especially to the LDC countries like Nepal.
an analytical approach for examining the features of
banking and insurance sector liberalization and reviewing
their strengths and weaknesses,
quantitative analysis for assessing the efficiency of
banking and insurance sectors as well as examining the
effect on access to services and employment creation,
a case study of banking sector (one each from government
owned, domestically private sector owned and joint
venture banks) to look into the impact on efficiency,
access to credit and employment in a comparative way.
Financial Sector Liberalization: Driving
Forces and Present Status
Multilateral Routes (WTO)
Although, prior to the accession to the WTO in April 2004, Nepal’s financial liberalization was carried out by the government unilaterally, donors were mainly instrumental. The first phase of financial liberalization which began in mid 1980 was influenced by the conditions laid down in the Structural Adjustment Program (SAP) of the WB and IMF. The second phase of wide ranging liberalization which began in the early 1990s was driven by the conditions incorporated in the Enhanced Structural Adjustment Facility (ESAF) Program of the IMF. Wave of liberalization including liberalization in India also contributed to the liberalization drive in Nepal.
Some of the major reforms carried out before accession
to the WTO include
Interest rate deregulation
Permission to establish banks and insurance companies in the
private sector including foreign equity participation up to 66 percent in banks and 100 percent in insurance sector in a case by case basis.
Phasing out of private sector lending by 2007.
Enactment of various laws including Nepal Rastra Bank Act
2002, Debt Recovery Act 2002 and now Bank and Financial Institutions Act 2006 aimed primarily at enhancing prudential rules and regulations in the financial institutions and raising competitive strength.
So far no major commitments under SAFTA
and BIMESTC. However, SAARC member
countries have decided to include service trade
within the free trading framework and a decision
on this respect is expected in coming month.
More importantly, Nepal has made certain
commitments under WTO membership
obligation having far reaching implications on
further opening up the banking and insurance
sector. Accordingly, Nepal must allow foreign
wholesale banking and insurance by 1st
Some Specific Policy Measures
Rules on Ownership
In general, at least 51 percent ownership should be occupied by promoters to establish any bank and financial institutions. At least 30 percent shares of total paid up capital should be allocated for general public.
Rules on Location
To establish a commercial bank operating all over Nepal, the paid up capital must be at least Rs 1 billion. For outside the Kathamdnu paid up capital must be Rs. 320 million.
Banks to be established with foreign promoters' participation have also to be registered fulfilling all the legal processes prescribed by the prevalent Nepal laws. For the establishment of Joint Venture Bank, the share capital of foreign joint venture bank should be at least 20 percent and it can't exceed 75 percent ( banks which are already operating in Nepal, otherwise two third at the most) of total paid up capital.
The Commercial banks established with a head office in Kathmandu are authorized to open a main branch office in the Valley initially and thereafter one more branch in Kathmandu Valley and then only branches outside Kathmandu Valley.
Rules on Employment
There are no specific rules and regulations that are required to be incorporated in the rules of employment. For employment to the foreigners separate technical agreement is required.
Rules and regulation directives of the central bank. Which include (I) Maintenance of capital adequacy, (ii) Loan classification & loan loss provisioning, (iii) Limit of credit exposure and facilities to single borrower, group of related borrowers and single sector of the economy, (iv) Accounting policies and formats of financial statements, (v) Minimization of risk, (vi) Corporate governance, (vii) Time-frame for implementation of regulatory directives issued in connection with inspection & supervision of the banks, (viii) Investment in shares & securities, (ix) Statistical reporting by commercial banks to NRB and (x) Sale and transfer of promoters share (xi) Provision related with Consortium financing (xii) Provision for blacklisting (xiii) Maintenance of Cash reserve ratio (xiv) Provisions for bank branches (xv) Provisions relating interest rate (xvi) Provisions related with financial resource collection.
The Insurance Act, 1992 and Insurance Regulation, 1993 are the main guidelines for the administration of the insurance industry in Nepal.
There is no restriction on pattern of ownership, location of business inside the country and in legal forms. However, in case of foreign joint venture, 20 percent of the share should be issued to the public for general subscription. The insurer is not allowed to operate life insurance and non-life insurance business side by side through the same organization.
There is a provision in the Insurance Act, 1992 that the Insurance Board may cancel the registration of an insurance company in the circumstances if the head office of the insurance business of any foreign insurer is situated out side Nepal, and in case it is felt that Nepalese insurer has not obtained equal facilities while operating in the foreign countries as enjoyed by the foreign insurer pursuant to the prevailing law of such country.
The insurer may operate life insurance business
under (a) whole life insurance (b) endowment
life insurance and (c) term life insurance
The foreign investor making an investment in
foreign currency shall be entitled to repatriate
share of equity, profit or dividend, and also
principal and interest on foreign loan.
The Insurance Board formulates policies for
systematizing, regulating, developing and
controlling insurance business.
Exchange Rate Policy
Nepal constantly is following two sets of policies
regarding the exchange rate-one for the IC and another
for convertible currencies.
The liberalization of the exchange rate gained momentum
after India introduced partial convertibility of the current
account in 1993. Nepal accepted the Article VIII of the
IMF in 1993 and thereby fully liberalized the current
account. Now convertible currency rate is market
However, Nepal has not been able to liberalize exchange
rate with India despite misalignment of the prices hurting
business competitiveness of Nepal.
An Overview of Financial Sector
Performance0 10 20 30 40 50 60 Number 1980 1985 1990 1995 2000 2005 Fi sc a l Y ea r
Growth of Financial Institutions
Total Assets of Financial Institutions (Mid- July 2005) CB 87% Others(Cooperativ es and NGOs) 1% MCDB 1% DB 5% 6%FC
0 10 20 30 40 50 60 70 80 90 100 Percentage of Participation NBL RBB NABIL NIBL SCBNL HBL NSBIBL NBBL EBL BKL NCCBL NICBL LB MBL KBL LXBL SBL Ba n k
Commercial Banks and Their Ownership Pattern
0 20000 40000 60000 80000 100000 120000 140000 NBL RBB NIBL BOKL NICBL NCCBL LBL M BL KBL LXBL SBL NABIL HBL SCBNL NSBIBL NBBL EBL
Total Assets, Deposit and Credit in the Bank ing System (Mid July 2005)
0 20 40 60 80 100 120 Depos it Ratio NBL RBB NIBL BOKL NICBL NCCBL LBL MBL KBL LXBL SBL NABIL HBL SCBNL NSBIBL NBBL EBL Ba n k
0 5 10 15 20 25 30 35 40 45 50 Share in Percentage 1990 1992 1994 1996 1998 2000 F is cal y e ar s
Lending Portfolio of the Comercial Banks
0 10 20 30 40 50 60 70 Percentage HHB Banks BRELATIVES BM LEND PPQABB PRQABB Bo rr o w in g
Household Borrowing and Access to bank Credit
0 5000 10000 15000 20000
Total Number of Employees
1991 1995 2000 2001 2005 F iscal Y e ar
0 2 4 6 8 10 12 14 16 Number Government Owned Private Sector Foreign Joint Venture Total T yp es o f O w n er sh ip
Ownership Structure at a Glance (Insurance)
0 5 10 15 20 25 30 35 Percentage 1996 1997 1998 1999 2000 2001 2002 2003 Fi sc a l y e a rs
Sectorwise Collection of Premium of Non Life Insurance
Investment Portfolio of Insurance Business
Rs in million
Number of Employement
Status of Employment
Case Studies of Three Banks0.0 5.0 10.0 15.0 20.0 25.0 30.0 Ratio 2000 2001 2002 2003 2004 2005 Fi scal Year
Loans to Staff Ratio
0 10 20 30 40 50 60 70 Percentage 2000 2001 2002 2003 2004 2005 Ye a r
Percentage of Non-performing Loan
0 20 40 60 80 100 2000 2001 2002 2003 2004 2005 F is cal Year
Fee Based Income to Total Income
0 1 2 3 4 2000 2001 2002 2003 2004 2005 F iscal Y ear
Net Interest Income to Total Assets
0 5 10 15 20 25 30 35 40 45 50 2001 2003 2005 F is c al y ear
Distribution of Loans by Business types of RBB
0 5 10 15 20 25 30 35 40 45 Share 2001 2003 2005 Fi sc al y ear
Distribution of Loans by Business Types of SCBNL
0 10 20 30 40 50 60 70 Share 2001 2003 2005 F is cal Y ear
Distribution of Loans by Business Types of NIB
Banks are engaged in developing new products and services. Most of the banks now use swift and Epabx for speedy banking transactions. Banks are also providing limited Internet banking facilities. Further extension will take place after the introduction of Cyber law in Nepal. Auto loan, home loan, education loan, employment loan, debit card, VISA and Master Card are increasingly becoming popular products of the commercial banks.
Internet Transactions vs Other the Counter
Banks have started to make certain banking transactions through internet banking. Mobile banking is used for balance enquiry, statement of transactions, alert notice etc. In general more than 98 percent of banking transactions are made over the counter. Now banks have started providing services of ATM, payment of electricity bill, telephone bill etc.
Risk Management in Commercial Bank
Very few banks have developed consumer scoring
model on their own but it is not a major criteria for
the purpose of providing loans or provisioning the
loan losses. The advanced form of loan grading and
credit portfolio management models are not used in
the commercial banks. Only very few banks do have
their internal risk based provisioning model. The risk
based provisioning model is not used in Nepal.
Conclusions and Implication for
Both industry and trade have been beneficiary of banking and insurance sector liberalization. Profitability ratio, margins, spread rate, fee based income to total income ratio, interest
income to total assets ratio and labor productivity in the form of loan to labor ratio indicate that efficiency of the private and
joint venture banks has greatly enhanced. They have employed a large number of people overtime.
However, an assessment of the entire banking system by including two government owned banks gives completely a different but disappointing picture. Studies show that these two banks became technically insolvent in 2002 as the share of non-performing assets in these banks reached about 60 percent of the total assets. The huge negative net worth and profitability has had very severe adverse effect on the entire financial system.
Although after contracting out the two banks to the foreign
companies some improvements in their performance has taken
place, adverse employment implication has been very large.
The deepening crisis in these banks has undermined the good
performance demonstrated by the private domestic and joint
venture banks. Access to the credit among the rural populous
has decreased over times. Similarly, the private domestic and
foreign joint venture banks have almost confined their
investment in the urban center with priority on lucrative
business. As a result, despite huge expansion in their
investment the productive areas have been least benefited.
This is true in case of insurance companies also. The
investment portfolio of such companies reveals that most of
their funds are kept in fixed deposit.
Implications for Policy Design and Implementation
Unilateral move under the external influence without rigorous domestic analysis examining the pros and cons would have very adverse effect on enhancing competition and ensuring healthy
development of the financial sector. Particularly, enactment of laws, development of institutional capacity both in central and concerned banks in terms of strengthening regulatory system would be a key in this respect.
One important implication from the policy design perspective is that unless excessive influence of the state in government run banks or insurance companies is stopped and restructuring is started
simultaneously that would have negative spill over effect on the entire financial system.
As the multilateral route through WTO compels to introduce various acts in the course of meeting WTO obligations, it would help
enhancing institutional and technical capacity. Hence, the multilateral route could be more viable and effective.
Strong curative as well as preventive measures for
improving the performance of the two banks is warranted.
While introducing measures, restructuring of two
commercial banks at a faster pace along with strong steps
to reduce NPAs will need top most priority. Likewise,
bank capitalization, implementation of regulations
effectively, improvement in risk management, better
governance including rules to promote transparency and
strengthening the capacity of the supervisory authority
would be essential. Accountability, transparency and
strict financial discipline are critically important in the
whole reform and or restructuring process.
Introduction of new products and diversification of
financial services will also be essential to improve the
financial health of the banking system.
Reduction of transaction cost is necessary. For this
efficiency not only in business service but also in the
physical infrastructure and other support services
would be essential.
There is a necessity of timely fulfillment of the WTO
commitments. Strengthening of financial laws by
promulgating bank rules, banking fraud control laws,
Asset Securitization law and Trustee law, among
others would be essential.
Nepal has to allow foreign wholesale banking by
2010. On the other; the problems are magnifying in
the banking system. Therefore, Nepal’s experience so
far indicates that either review of deadline or some
support measures would be essential.
In view of access to credit among the rural populous
decreasing on the one hand and restructuring of banks making
very adverse effects on employment on the other,
consideration of some safeguard measures in the international
trade forums for the LDCs like Nepal would be essential.