Services Trade in Nepal: A Comparative Case Study of Banking and Insurance Sectors

Transcription

1 Services Trade in Nepal: A Comparative Case Study of Banking and Insurance Sectors D. R. Khanal Institute for Policy Research and Development (IPRAD)

2 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.

3 Methodology 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.

4 Financial Sector Liberalization: Driving Forces and Present Status Driving Forces Unilateral Regional Commitments 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 liberalization drive in Nepal. India also contributed to the

5 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 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.

6 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 1 st January, 2010.

7 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. Legal Forms 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.

8 Branching 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. Prudential Regulations 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. Off-Site Inspection Special Inspection On-Site Inspection

9 Insurance 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.

10 Operations 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.

11 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 Nepal accepted the Article VIII of the IMF in 1993 and thereby fully liberalized the current account. Now convertible currency rate is market determined. However, Nepal has not been able to liberalize exchange rate with India despite misalignment of the prices hurting business competitiveness of Nepal.

12 An Overview of Financial Sector Performance Growth of Financial Institutions Fiscal Year Number CB DB FC MCDB SCC NGOs

13 Total Assets of Financial Institutions (Mid- July 2005) MCDB 1% DB 5% FC 6% Others(Cooperativ es and NGOs) 1% CB 87%

14 Commercial Banks and Their Ownership Pattern SBL LXBL KBL MBL LB NICBL NCCBL BKL Bank EBL NBBL NSBIBL HBL SCBNL NIBL NABIL RBB NBL Percentage of Participation Governemnt Private Foreign

15 Total Assets, Deposit and Credit in the Banking System (Mid July 2005) EBL NBBL NSBIBL SCBNL HBL NABIL SBL LXBL KBL MBL LBL NCCBL NICBL BOKL NIBL RBB NBL Total Assets Deposits Credit

16 Credit Deposit Ratio EBL NBBL NSBIBL Bank SCBNL HBL NABIL SBL LXBL KBL MBL LBL NCCBL NICBL BOKL NIBL RBB NBL Deposit Ratio

17 Lending Portfolio of the Comercial Banks Fiscal years Share in Percentage Agri Indust comme General use/social purpose social sector

18 Household Borrowing and Access to bank Credit PRQABB PPQABB Borrowing BMLEND BRELATIVES Banks HHB Percentage 1995/ /04

19 Number Employees in Commercial Banks Fiscal Year Total Number of Employees

20 Ownership Structure at a Glance (Insurance) T ypes of O w nership Total Joint Venture Foreign Private Sector Government Owned Number General Life Composite

21 Sectorwise Collection of Premium of Non Life Insurance Fiscal years Percentage Fire Mari. Avia. Motor Contract Risk & Eng. Misc

22 Investment Portfolio of Insurance Business Fiscal Year Rs in million Life Non-life

23 Status of Employment Fiscal Y ear Number of Employement

24 Case Studies of Three Banks Loans to Staff Ratio Fiscal Year Ratio RBB NIBL SCBNL

25 Percentage of Non-performing Loan Year Percentage SCBNL NIBL RBB

26 Fee Based Income to Total Income Fiscal Year SCBN L RBB NIBL

27 Net Interest Income to Total Assets 2005 Fiscal Year SCBN L RBB NIBL

28 Distribution of Loans by Business types of RBB 2005 Fiscal year Agricultural Sector Industrial Sector Commercial Sector Services Sector General use & Social Purpose

29 Distribution of Loans by Business Types of SCBNL 2005 Fiscal y ear Agricultural Sector Industrial Sector Commercial Sector Services Sector General use & Social Purpose Share

30 Distribution of Loans by Business Types of NIB 2005 Fiscal Year Agricultural Sector Industrial Sector Commercial Sector Services Sector General use & Social Purpose Share

31 Innovation 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.

32 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.

33 Conclusions and Implication for Managing Change Conclusion 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 nonperforming 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.

34 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.

35 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.

36 Managing Change 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.

37 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 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.

38 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. WTO obligations insurance sector needs various reforms like; (i) strengthening of legal, regulatory and supervisory frameworks, (2) maintenance of soundness in operational and management of insurance institutions, (3) introduction of dispute settlement mechanism and strengthening of capital base, (4) exploration of reinsurance business (5) deepening of service reach to the general masses, (6) capacity enhancement and integration among the insurance companies and (7) reforms in activities of state owned insurance institutions.

39 THANK YOU.