It is clear that the majority of Nepalese citizens / society of Nepal has not had the privilege of banking services. This segment covers over 80% of Nepal and is those that live in both urban/rural areas of Nepal. These segments have traditionally been considered “not bankable” and or having very high costs and high risks. However, the financial institutions should not consider the segment in this way. As per the main objective of the financial institutions of the country they should have vision and mission of becoming a strategic player as an economic engine for the national – all segments of society have to be serviced. This task can be achieved with tools such as: promotion of microfinance, micro enterprise development and small & medium enterprises. However sincere political will, private sector involvement and participatory community are the success ingredients.
With regards to rural/urban small and medium enterprises and micro financing, it is known that the problems for commercial banks has never been the “money / capital” but the “access” to it. The ratio between the deposit, loans & advances and investments is as follows 23: 14: 5 (2004, Nrb). It should not be ignored that this segment of the Nepalese population can be a potential credit-deposit business opportunity. The annual reports of most of the institutions catering this segment show that the repayment ratio is higher than 95%. However it should be noted that according to the United Nations Capital Development Fund, just 1% of MFIs around the world are financially stable, and Nepal is no different.
Most importantly over the last few years, the margins have shrunk primarily due to overcrowding of the lenders in few market segments weakening the demand for finance in business sectors. This also makes MF and SME an alternative lucrative business opportunity. However the commercial banks lack the experience and expertise as required. Hence, it would be prudent to invest in pilot actions for some time with the help of external advisers and third party’s that have local and regional knowledge and acceptance. It is necessary to invest money in action research, trainings to better the human resources and also to change the conventional banker’s perception that, “the poor are not bankable.”
This vision is a necessary to be cultivated in most of the senior management of such institutions. SMEs and Micro finance is where the immense opportunity lies to distinctively create a competitive advantage over the big foreign financial institutions that can enter the Nepalese markets in 2010. In addition to immense business opportunity in the untapped market. This portfolio would further add to banks books which can differentiate the bank from others for a merger /acquisition which is inevitable in 2007. The global competitions will strategically force many financial institutions for mergers/acquisitions.
According to the Trade Insight, “Over 95 percent of the industrial establishment in Nepal fall in the SME category, generating over 80 percent industrial employment.” However this strata has also been deprived from the banking services. In most cases no loan below 2500 K is provided by a commercial bank. Where such loan facility exists, a conventional means of collateral is demanded. It is high time the financial institutes adopt an innovative means of collateral. Joint effort would be made with various interest groups: NGOs, INGOs, international agencies, private & public entity and Government to develop modality to facilitate loans and other banking services in SMEs and micro financing. However it is necessary for the partners to restrict themselves to their field of expertise in an integrated framework approach to create a win-win situation.
In the past the multi/bilateral Aid agencies have distorted the market. They have seriously failed to draw a line between the credit Vs non-credit capital. This has led to a perception that all loans are aid or soft loan. The banking industry has to work with various tools of awareness programs, orientation and by offering products and services targeted to this sector bring a shift in such perceptions. It should be clearly understood that this is a business-to-business proposition and is thus a profit motive exercise. However, due to this being a new area for the banks, flexibility in how to approach this sector will be of primary importance and the banks willingness to do that in order to develop products / services to this segment. It is highly recommended to include services like insurance and since poor households generally are more vulnerable to risk.
The remittances to developing countries have over USD 126 billion in 2004,up by nearly 50 percent received in 2001 (NRB). Approximately 12 % of Nepalese GDP is contributed by remittance. But the fact remains that 60 % of the remitted money enter through informal channels. By 2001/02 Nepalese migrants in Middle East and Malaysia were 242,004. This number increased more than 2.5 times to 608,525 by 2004/2005. Most of the migrant workers fall in target customer of the business sector being discussed. Packaging remittance to the products/services will definitely increase the outreach of the banks through ties with rural based MFIs.
The study of behavioral and ethical fibers of the customers is the key determinant to the banks success. I would also like to mention commercials banks in other countries with success offer such loans-deposits. ICICI-India is the 2nd largest bank in India having catered products and services to these strata of population.
It should be a prime goal of the Nepal Rastra Bank (NRB) to facilitate and encourage the commercial banks to down scale a unit within the bank to offer products and services to these strata of the society. This sector can be regulated through better and more specific priority sector-lending directive. However the priority sector lending will be scraped from 2007. To mention few other incentives to encourage the commercial banks could be tax rebates, refinancing of the loan, organizing trainings and exchange programs with other foreign banks in such businesses. In additions to these the private-public partnerships should be encouraged to create a synergy in business modality.
However it is also need of the time to create a Credit Rating Bureau in this sector of business. A database of the customer’s history should be maintained to avoid the loan duplication. This will decrease the operational costs of the commercial bank. This will also save a lot of time that had to be spent on such analytical study.
Various modalities have worked in different countries blending into its geographical, political and socio -economic context. In the harsh situation facing Nepal partnership with Community Based Organization (CBOs) and Cooperatives would be a pragmatic strategy for both increasing the outreach and to get the feel of doing business in this strata of population. I would also advise the banking industry to create platforms where knowledge and experience can be shared and exchanged. This will act as a catalyst in the evolution of this sector.
Last but not the least I recommend all the commercial banks to think out of the box and get involved in extending their products and services to new segments of the society. They should not forget their obligation to bring financial inclusion in the society. Furthermore this should not be ignored when the returns in this segment is higher than the other segments. Moreover the pie of this segment is so big that the competitions can be ignored. However special care should be given to develop mechanism to facilitate such markets. This strategy would help injecting money into the economy bringing about change in various spheres of the country.
– Anup Bhandari
(The author is currently working at Bank of Kathmandu Ltd as Head-Micro Finance)
