Nepal Asks Lenders to Expand Branches as Maoist Hostility Ends

By Cherian Thomas

June 23 (Bloomberg) -- Nepal’s central bank urged commercial lenders to take advantage of the end of a decade of Maoist violence to expand in rural areas and support economic growth, Governor Deependra Bahadur Kshetry said.

“The central bank’s top priority is to ensure commercial banking services reach everyone,” Kshetry said in an interview in his Nepal Rastra Bank office in Kathmandu yesterday. “Access to finance is the fundamental need for growth.”

Seventy percent of Nepal’s 26 million people don’t have access to commercial banks and the World Bank says there’s chance to correct that after Maoist rebels laid down arms in November 2006. A dearth of funding has choked economic growth in the Himalayan nation’s $9 billion economy, forcing more than a third of its people to eke a living on less than $1 a day.

“Spreading the wings of banks is key to Nepal’s development,” said Birat Thapa, an executive committee member of the Federation of Nepal Chambers of Commerce and Industry. “It’s starting to happen.”

Bank branches declined to 1.76 per 100,000 people in Nepal in 2006 from 2.09 in 2001 as the Maoist insurgency spread, making access to finance the worst in South Asia, according to a March 2009 World Bank report. In 2006, India had 6.4 bank branches per 100,000 people.

Rural Banking

Nepal has 26 commercial banks, and about 170 smaller financial institutions, according to the Nepal Rastra Bank.

“Earlier there was also this perception that rural banking is unviable -- it’s not the case any longer,” Kshetry said. “Remittances into rural areas from Nepalese living abroad have surged and banks are tempted to tap that.”

More than 2 million Nepalese work in the Gulf, South East Asian countries and other parts of the world. In the first nine months of the year ended March 31, they sent 150 billion rupees ($1.9 billion) to Nepal, an increase of 60 percent from the same period a year earlier. Remittances are the biggest foreign currency earnings of Nepal, and account for 40 percent of the total reserves.

Still, Nepal, Asia’s youngest democracy after its 240-year- old monarchy was ousted last year, is in the midst of political chaos again.

The Maoist-led government, which took power nine months ago after winning a general election, fell in May following a failed attempt to sack the head of the army.

A group of rival political parties led by Madhav Kumar Nepal of the Communist party of Nepal (Unified Marxist-Leninist) have formed a new ruling coalition.

Maoist Threat

The Maoists have pledged to boycott parliament and disrupt daily life in Nepal until the president reverses his move to reinstate the head of the army and apologizes.

The Maoists are scheduled to meet today to discuss the future of the party. It will be the first meeting of the 45- member politburo since party leader Pushpa Kamal Dahal -- known as Prachanda -- resigned as prime minister.

The unrest has promoted strikes in various parts of the country and crippled industrial production, which fell 1.5 percent in the 11 months to May, Kshetry said. Economic growth may slow to 3.5 percent in the year ending June 30 from 5.6 percent in the previous year, he said.

“I am hopeful that peace will prevail,” Kshetry said.

Kshetry said he can’t lower interest rates to support economic expansion because of high inflation. Nepal’s inflation rate climbed to 11.9 percent in March from 9 percent a year earlier because of a shortage of food and fuel, Kshetry said.

Interest Rate

The central bank raised the cash reserve ratio to 5.5 percent from 5 percent and the key bank rate to 6.5 percent from 6.25 percent in October 2008. It has kept policy rates unchanged since, Kshetry said.

“Next year, we will be able to scale inflation down,” the governor said, without giving a forecast.

Nepal, which shares an open border with India and pegs its currency to the Indian rupee, is relying on faster economic growth in India to pull its economy forward. Sixty percent of Nepal’s foreign trade is with India.

To contact the reporter on this story: Cherian Thomas in Kathmandu at Cthomas1@bloomberg.net