Financial Institutional Operations in Nepal

Background of the Country

Nepal is one of the least developed countries in the world having US$ 220.00 per capita income. The Nepalese economy is predominantly an agricultural economy. About 81 percent of the population is engaged in the agriculture sector whereas about 86 percent of the population lives in the rural sector of the country. Agricultural sector contributes 40 percent to Gross Domestic Product (GDP) of the country. According to the National Living Standard Survey 1996, about 42 percent of the population were found to be living below poverty line but at the end of the Ninth Plan 2001, the figure has comedown to 38 percent.

Nepal has been witnessing planned development efforts since the last four and a half decades. The Ninth Five Year Plan has just completed in 2001. The objectives envisaged in most of the plans aim at reducing poverty. However, the intensity of poverty in the country calls for massive and genuine efforts.

An Overview of Financial System

The history of modern financial system of Nepal was begun in 1937 with the establishment of the Nepal Bank Ltd. (NBL) as the first commercial bank of Nepal with the joint ownership of government and general public. As mentioned above, Nepal Rastra Bank (NRB) was established after 19 years since the establishment of the first commercial bank ( i.e.,NBL). After the establishment of NRB, Nepal witnessed a systematic development of the financial system. After the restoration of democracy in 1991, Nepal has clearly been following a liberalized economic policy and witnessing diversification in financial system. As a result, various banking and non-banking financial institutions have come into existence. As of mid-July 2002, there are 16 Commercial Banks, 16 Development Banks, 5 Regional Rural Development Banks, 54 Finance Companies, 34 Saving and Credit Cooperatives and 25 Non Governmental Organizations (NGOs) operating in the country. These financial institutions are under the regulation and supervision of the NRB. Besides these institutions, there are more than 1500 registered saving and credit cooperatives operating in the different part of the country and there are many NGOs involves in this sector.

Evolution of Institutional Micro Credit Activities

The banking system in Nepal was introduced with the establishment of Nepal Bank Ltd. (NBL) in 1937. However, the activities of the bank was confined to accepting deposits & providing loans only to the commercial sector in Kathmandu and other limited urban areas. The country's central bank- Nepal Rastra Bank ( NRB) was established in 1956. In the initial years of operation, the NRB had been focusing towards monetization of the economy by circulating Nepalese currency all over the country. After achieving some progress, it started taking initiation towards institutional development. Consequently, Nepal Industrial Development Corporation (NIDC), Agricultural Development Bank (ADB/N) and Rastriya Banijya Bank (RBB) had been established.

The establishment of ADB/N was a landmark in the development of rural financial market in Nepal. However, it would be worth mentioning that the institutionalization of rural credit was actually begun in 1956, when cooperatives were established in Chitwan with a view to providing credit support to the resettlers. In the year 1974, the NRB introduced the concept of directed lending so that a said proportion of the commercial bank's sources could be utilized for the development of rural and agricultural sectors. The concept of directed lending was also considered to be a ground breaking initiative in the development of small sector comprising agriculture, cottage industry and services.

In order to support the national goal of poverty reduction, Nepal Rastra Bank has been carrying out a number of developmental functions along with its core function of central banking. For the development of rural financial system in particular, the NRB has initiated institutional development programs as well as various rural financing programs aimed at raising the standard of living of the people living in abject poverty below the poverty line and reduce the regional disparities. At the same time, it also encourages private sectors to take part in the rural financial system.

Micro-Finance Policies in Nepal

Nepal Rastra Bank Act, 2002 has empowered the NRB to inspect and supervise all financial institutions including Rural Micro-Financial Institutions and issue directives. So, NRB has played a key role in policy formation and execution to the financial institutions. The major policies issued for the Micro-Financial institutions are as follows:

* Commercial banks are required to extend 12 percent of their outstanding loans and advances as priority sector