Growth of Assets in the Banking System of Nepal: Factors Driving the Expansion

The banking system in Nepal has witnessed significant growth in recent years, with total assets of financial institutions (BFIs) increasing by 19.89 percent to NPR 4,286.19 billion as per NRB report of mid-July 2019, compared to NPR 3,574.90 billion a year ago. This growth has been mainly driven by an increase in deposits and credits, which is supported by the wider adoption of information technology, remittance inflows, and expansion in banking outreach. This article explores the factors behind the growth of assets in the banking system of Nepal, along with the challenges that come with it.

Factors Driving the Growth of Assets

• Increased Banking Habits and Expansion in Banking Outreach:

The growth of assets in the banking system of Nepal is partly due to the increasing banking habits of Nepalese people. In recent years, people have become more inclined towards saving and investing their money in banks. Additionally, the expansion of banking outreach has enabled banks to reach more people in remote areas of Nepal, thereby increasing the number of customers and deposits.

• Wider Adoption of Information Technology:

The wider adoption of information technology has played a critical role in the growth of assets in the banking system of Nepal. Banks have been able to introduce innovative and efficient banking services such as mobile and internet banking, which have made banking transactions more convenient and accessible for customers. This has led to an increase in the number of transactions, deposits, and credits in the banking system.

• Remittance Inflows:

Nepal is one of the top remittance-receiving countries in the world. According to the World Bank, in 2020, remittance inflows to Nepal accounted for 28.4 percent of its gross domestic product (GDP). The remittance inflows have contributed significantly to the growth of deposits in the banking system of Nepal.

• Increase in Paid-up Capital and Reserves:

The liabilities side of the balance sheet of BFIs has grown due to an increase in paid-up capital and reserves through the issuance of right shares, bonus shares, and an increase in profits. The government has also injected significant capital in state-owned banks, which has contributed to the growth of assets in the banking system.

Challenges of the Growth of Assets

• Concentration of Banking Assets:

As of mid-July 2019, the five large commercial banks, namely RBB, NICA, NIBL, NABIL, and EBL, collectively accounted for 24.73 percent of total banking system assets and 28.74 percent of total commercial banks' assets. This concentration of banking assets to a few banks in Nepal poses a risk to financial stability. The failure of any of these large banks is likely to have a significant impact on the banking system's stability.

• Limited Access to Finance:

Despite the significant growth in the banking system, many Nepalese people, especially those living in rural areas, still have limited access to finance. This limits their ability to save, invest, and access credit facilities, which could help improve their livelihoods.

The growth of assets in the banking system of Nepal has been driven by increased banking habits, expansion in banking outreach, wider adoption of information technology, remittance inflows, and an increase in paid-up capital and reserves. While this growth presents many opportunities, it also comes with challenges such as concentration of banking assets and limited access to finance for some Nepalese people. Therefore, there is a need for policies and measures that promote financial inclusion and reduce the concentration of banking assets to ensure the stability of the banking system and promote sustainable economic growth.