Financial Institutions in Nepal

The history of financial institutions is not very old. When banking sector started carrying out current activities of finance company, large number of finance companies was established and they expanded at a rapid pace in the developed countries, UK and USA in 1960s. Their growth was very rapid in comparison to commercial banks as they used to offer higher interest rate on deposits, lower interest rates on loans and swifter than commercial banks. 

       In the context of Nepal, there were few insurance companies and Karmachari Sanchaya Kosh working as non-banking financial institution before enactment of Finance Company Act, 2042. Need of Finance Company Act was felt because unauthorized sector was collecting savings from the common public in the name of Upahar and Dhukuti programmes. People showed great interest and enthusiasm in these programmes but they were cheated by most of the organizers of these programmes. Considering peoples’ interest in such programmes, benefit of mobilizing such savings in productive sector, banking sectors’ inability to carry out capital market activities and to meet consumers’ need for credit, government felt the need of finance companies and introduced Finance Company Act, 2042. However, no finance company set up till 2049 because the act came into being only in 2049 with some amendments.

       Wave of establishing finance companies began only when NRB authorized co-operative institutions set up under Co-operative Act, 2048 to accept deposit and give credit. “Nepal Awash Bikash Bitta Company Ltd” is the first finance company established in 2049, promoted by Rastriya Beema Sansthan, Nepal Bank Limited, Rastriya Banijya Bank, Agriculture Development Bank and Nepal Arab Bank Limited. In the even year, Nepal Finance and Savings Company Limited were established from the private sector.

       In a short span, number of non-banking financial institutions has drastically grown up. Now, finance companies are 44 in numbers. The number of insurance companies, co-operative institutions, NGOs authorized for limited banking activities, postal saving banks are also growing. The reason for their speedy growth is higher interest rate on deposits, low administration cost, swift service, swift decision, less liquidity and high demand for consumer credit. Moreover, they have curtailed Dhukuti and Upahar programmes and have removed demerits.

        However, collapse of banking sector, especially finance companies in South East Asia has adversely affected finance companies in Nepal. They have not yet earned public confidence. People have started judging the safety of their deposit instead of interest rate. Most of their finance companies are running at profit because of excess liquidity with banks which they borrowed at lower rate and purchase National Savings Bonds yielding higher interest rate. Nepal Rastra Bank has decided not to allow finance companies to purchase national savings bonds which will adversely affect their profitability. They are required to increase their fee-based activities because banks have almost neglected this sector. If they concentrate only on credit-deposit, they will find hard time ahead. Moreover, NRB’s regulation regarding the period of deposit and loan is inconsistent.

  

        Though large numbers of non-banking financial institutions are in operation, most of them are in urban area. Unhealthy competitions, lack of loan diversification, dispute among promoters are other areas where these companies should pay attention to.