Banking System Development in Nepal : A Comparative Analysis

This paper presents the analysis of the structure and major financial highlights of the commercial banking sector in Nepal. As a major component of financial system, the commercial banking sector accounts for more than three fourth of all banking system assets, deposits, loans and investments in Nepal. There is highly asymmetric distribution of assets, deposits, loans and investments within the industry and the market share of public sector banks in terms of overall banking products is still dominant. Despite the satisfactory growth and development of the private sector financial institutions during the nineties, the overall performance of the financial system is undermined due to the problems arising from the two largest public sector banks making huge amount of accumulated loss and non-performing loans (NPLs). The international comparison of the performance of Nepalese banking system with that of selected developed as well as developing economies shows mixed results. Measured in terms of size of financial intermediaries, bank\u27s involvement in the private sector and concentration indices, we find poor indicators of Nepalese banking system compared with some developing and all developed economies. However, the efficiency measures, given by IFS and Fitch\u27s Bankscope data, provide rather ambiguous results showing the comparable ratios of overhead costs and net interest margin to GDP between developed as well as developing economies. The overall analysis shows that the banking sector is/will remain the major source of corporate finance in Nepal. The lack of good and independent corporate governance system and efficient credit monitoring mechanism are the two major reasons for degrading financial conditions of public sector banks (NBL & RBB)