Ans: The banks are institutions dealing with deposits and loans. They face various problems in collecting deposits and with disbursal of loans. Some of them are:
Problems with collection of deposits: Low coverage of banks: Most of the banks are centralized in urban areas and large areas in remote sector are untapped. The banks are unable to tap the resource in most of the urban areas. However many banks have moved to these areas through expansion of branches, BLBs, e-banking.
Poor Fiancial Literacy: The financial literacy is lacking in the Nepalase society which has caused poor management of the resource and lack of knowledge of benefits of savings. The banks have failed to make proper investment in these aspects. Huge amount lurks under pillows of Nepalese households. Even now the local shaus and mahajans are believed more than the banks.
Unhealthy Competition: All banks aim at luring the same customer base by various lucrative services. As a result of which the same customers mainly salary earning employees or small retailers have opened accounts in various banks. Banking Frauds: Time and often various banking frauds are seen in the economy and as such many depositors are reluctant to deposit their money in banks. Rahter they feel safe to keep the liquid fund with themselves.
Few /Poor Banking Products: The depositors find few banking products to carry out their transactions. So they keep liquid fund with themselves rather than depositing in the banks. Plenty of ATMs, Cash Deposit Machine, massive use of mobile banking, easy use of cards in daily transactions can lead to less use of currency and the banks can gain much benefit in the form of deposits. On the other hand the technical aspects like net works, knowledge of use of products etc also pose problems.
Non formal and non monetized economy: Even now the transactions in Nepales economy are non monetized. The trade dealers are found exchanging goods for goods in the villages. The advanced form of bartner system is found in hat bazaars. Hudi is still major way of transferring money. These activities hinder the deposit mobilization of the country. People find investing in land and precious metal more beneficial than depositing in the banks.
Influence of Indian Banks: Most of the Nepalese are residing in the borders of India and depend on Indian currency for their daily transactions. So they either deposit their money in Indian banks or hold money in indain currency. This does not help banks in gaining deposits from the public.
Slow economic growth: Nepales economy is facing slow economic growth which means low production, capital flight, low employment and low capital expenditures. These factors are barriers to the deposit mobilization. Major deposit of banks depends on the growth rate of remittance. While economy faces slow growth rate in remittance, the deposit collection of banks faces problem. On the other hand the so collected deposit is withdrawn to purchase luxurious goods mainly imported.
Undue Pressure from Institutional Depositors: The banks depend on institutional depositors for deposits. Those depositors put undue pressures on banks regarding high interest rates, services and others. The banks cannot annoy them but bear cost higher than normal deposits and dissatisfaction in employees.
Liquidity Problems: Due to proper management of fund on the part of banks and financial institution and lack of timely management of regulatory authority the Nepalese economy face excess liquidity and liquidity crunch time and again. This causes fluctuation of interest rate in the market. Thus the loss of confidence in the depositors is apparent in the general public which is threat in deposit mobilization especially from them who are speculative.
Shadow Banking: Many cooperatives and dhukutis are present in the nepalse economy which has caused difficulties in the getting deposits to the commercial banks. However this shadow sector can be opportunity if tapped wisely. As these sectors are less regulated, any problem in these sector can cause systemic risk and can cause threat to banks activity of collecting deposits.
Problems with disbursal of Loan in Banks
Non Formal Sector: In Nepalese economy still small entrepreneurs, farmers and retailers enjoy loans from local money lenders and have less knowledge about the banking process. So banks depend only on few customers who have access of banking loans and ignore large sector of society. Banks lend only for a particular purpose and expenses for social purspose like marriage, dowry, and festivals are not entertained. In this case too, the non formal lending is rejoiced by the borrowers.
Collateral Based Lending: Nepalese banks still base their lending on the collateral of fixed assets. Many small borrowers either do not have proper fixed assets to mortgage or banks hesitate to accept their assets as collateral due to the marketable aspects of the collateral. In most of the cases the ownership of the collateral is major problem. The collateral base lending carries with it hectic jobs of valuation, registration and others which is time consuming and expensive. So many lenders find lending from non formal sector easy and reliable.
Unhealthy Competition: As there is low growth of business and productive sector, same customer is found to be moving from one bank to other bank. While doing this, the banks offer interest rate much lower than offered to general borrowers or give good margin on the collateral which can cost huge loss to the banks in future. It is found that banks lend much more than justified by the business only to lure the customer of other banks which has been seen major problem in the banking industry.
Lack of Proper Functioning of Rating Agency and Assets Management Company: Although Credit Rating Agencies are functioning in the economy, the lending activitiy has not still developed on the basis of credit ratings. So banks rely on the financial statements presented by the customer which is often found false and collateral which also has various legal problems. Likewise assets Management Company is not functioning properly which has caused threat to the banks in case of non banking assets.
Frauds: The banks face various frauds while lending. The customers present false documents, show other are business manipulate fianancial statements to obtain loans. The legal documents are hidden or manipulated. Same collateral mortgaged in different banks. Collateral property has various frauds like wrong plot mortgaged, wrong collateral valuated, over valuated etc. These all have caused problems in lending of banks.
Lack of Efficient Bank Staff: There is lack of efficient bank staff in the banking industry. High rate of turnover and rapid expansion of branches and recruitments, lack of proper training and academic institutions, the banks do not have efficient staff to work in credit department. This has caused various elapses in documentation, project appraisal and proper monitoring of loan client. Simillarly, few efficient staff seems to have been moving to various banks and financial institution. These staffs have been found involved in fradulant activities sometimes.
Undue Influence of Corporate Borrowers: As there are few corporate bodies in the country, large borrowers force banks to provide loans to them in terms and conditions which may be harmful to the banks in future. The banks do not like to annoy them but are found to face various legal and economic losses due to them.
Political Pressures: The banks lend sometimes on the pressures of political leaders. These leaders put undue pressures on the banks to lend to their cadares who are not true business persons. The recovery actions for these borrowers are also troublesome.
Slow Economic Growth : Nepalse economy is stagnant and the growth rate not aspiring for the production and trade to grow. Most of the economy is based on agriculture which imports from neighbouring countries and then refines and sells them in the local market. These industries and trade businesss is valnurable to market fluctuation, government policies and market on the other side of the country. So banks find difficult to invest in such business. On the other hand they do not find the proper sector to invest and bear risk unwillingly. The remittance based economy is also unstable and so the trade business is also unstable and non promosing for banks to make loan investment.
Unstable Policies: The government and regulatory body mainly NRB issues directives to guide the lending activities of the banks. The banks are forced to lend in those sectors which they sometimes do not find safe. These policies are changed time and again which brings perplex situation in decision making of banks. The same industry is prioritized sometimes while sometimes not, the subsidy is granted sometimes while the rival industry is previlaged other times.
This causes fear in the banks for the safety of their funds.
Microcredit, or microfinance, is banking the unbankables, bringing credit, savings and other essential financial services within the reach of millions of people who are too poor to be served by regular banks, in most cases because they are unable to offer sufficient collateral. Microfinance is a source of financial services for entrepreneurs and small businesses lacking access to banking and related services. The two main mechanisms for the delivery of financial services to such clients are:
(1) relationship-based banking for individual entrepreneurs and small businesses; and
(2) group-based models, where several entrepreneurs come together to apply for loans and other services as a group.
In some regions, for example Southern Africa, microfinance is used to describe the supply of financial services to low-income employees, which is closer to the retail finance model prevalent in mainstream banking. For some, microfinance is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers."
[1] Many of those who promote microfinance generally believe that such access will help poor people out of poverty, including participants in the Microcredit Summit Campaign. For others, microfinance is a way to promote economic development, employment and growth through the support of micro-entrepreneurs and small businesses.
Microfinance is a broad category of services, which includes microcredit. Microcredit is provision of credit services to poor clients. Microcredit is one of the aspects of microfinance and the two are often confused. Critics may attack microcredit while referring to it indiscriminately as either 'microcredit' or 'microfinance'. Due to the broad range of microfinance services, it is difficult to assess impact, and very few studies have tried to assess its full impact.
[2] Proponents often claim that microfinance lifts people out of poverty, but the evidence is mixed. What it does do, however, is to enhance financial inclusion.
Microfinance is defined as, financial services such as savings accounts, insurance funds and credit provided to poor and low income clients so as to help them increase their income, thereby improving their standard of living.
In this context the main features of microfinance are:
Loan given without security
Loans to those people who live below the poverty line.
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