Understanding Financial Literacy and Customer Protection Situations of Nepalese Banks and Financial Institutions.

In today's globalized era, it is utmost important to understand the financial literacy environments of Nepalese banks and financial Institutions (BFIs).

Financial literacy makes the behavioral changes _ through better financial decision making. It is the understanding of various financial areas (like money, investments, personal finance) that helps to use their financial resources wisely. This helps an individual to know about his earnings, savings and investments.

Customer protection is the way through which the customers gets shield in relation to unfavorable situations. Financial literacy helps the customer to get protected.

As per the data provided by Nepal Rastra Bank, the number of branches of BFIs stood at 6,418 in mid-June 2018. These include 2,919 branches of commercial banks, 951 of development banks, 183 of finance companies and 2,365 of micro-finance institutions.

On an average, population served by per branch of BFIs stood at 4490 in mid-June 2018 compared to 5,809 a year ago. Of the total 753 local levels formed in the process of implementing federalism, commercial banks have shown their presence in 556 as of 8 July 2018. A research has also said that, more than 40 % of the people are out of the banking channel. This is due to lack of financial knowledge among the Nepalese people.

Poor financial literacy may lead to poor investment decisions, victim of higher interest rates, poor credit facilities, high opportunity costs and even bankruptcy.Therefore, financial customer protection and financial literacy has become the today’s necessity.

Nepal Rastra Bank has directed through its directive number 21 of its Unified Directive- 2075  to all its licensed banks and financial institutions to protect financial customer and enhance financial literacy.

Some of the arrangements that are made for Nepalese BFIs in relation to Financial Literacy and customer protection are as follows :

A ) Transparency related arrangements for Nepalese banks :

All the banking and financial institutions has to disclose all the necessary information regarding the nature of service provided, the charges charged under several names (fees, commission, brokerages, interest, fines, penalties), the procedures that is to be adopted and other kinds of conditions imposed for providing the services.

For this they generally do following activities:

a ) The banks and financial institutions makes necessary arrangements to their customers about
 -the services provided, types of accounts with different names offered, types of loans offered, financial services provided through electronic devices 
– through pamphlets, brouchers, diaries or through booklets to their customers.

b) The Nepalese banks clearly communicates the following details in precise, clear, free from ambiguity, topics orderly arranged and in simple language about following:

• Different types of accounts in operation (like saving account, fixed deposit account, current account, karmachari account, chuna muna account and so on).

• The details regarding fees charged to their customers for availing different types of services and facilities.

• The process to close the account.

• The methods of computing interest.

• The Advance payment fees.

• The actions to be taken on making default in payments of interest on time.

• Late fees charges

• Penalties fees

• The process of operating different types of electronic cards and their procedures.

• Details of possible banking offences and

• The details regarding the necessary safety measures that the customers has to comply .

c) All the Nepalese banks are required to send their details regarding different cost, interest related details as per the direction given by Nepal Rastra Bank, in specified format.

d) These details are also hosted on the website of the respective banks.

B ) Language related arrangements for Nepalese banks:

The BFIs are required to use easy and understandable language while providing financial services to its customer. The documents used for operating there clients are to be prepared as follows:


a) For Nepalese customer- in Nepalese language 

b) For Internal and International transaction purpose- in English languages

C ) Information related arrangements for Nepalese banks:

The BFIs are required to use easy, understandable and free from ambiguity
language while providing financial services to its customer.

D ) Simple banking related arrangements for Nepalese banks:

All the Nepalese banks has to make special, preferential and simplified arrangements regarding :

• Senior citizen

• Differently able citizen

They should be served through easily accessible counters and help whenever required while operation of banking transaction.

E ) Amended Fees related arrangements for Nepalese banks:

Any charges in contrary to the previous contracts is disclosed to the respective sections of customer. For the public interest, this changes in new structure of interest rates are also to be published in national daily newspaper (for nationally operated banks), regional/ district newspaper (for district operated banks ).

F ) Accounts related arrangements for Nepalese banks:

Nepalese banks are not allowed to take any charges in any name in providing following services:

• Opening deposits account

• Issuing cheques

• Operating accounts

• Closing accounts after 6 month of opening accounts.

• Providing the statements

• Providing loan to natural person up to Nepalese Rs.2, 00,000 through any branch banking services.

• When dormant accounts are made active.

However, they are free to charge fee, if any customer constantly demands the statements for same period more than once.

On issuing the card in Nepalese currency, No banks are allowed to charge any charge - for providing electronic cards except issue cost and renewal charges (on expiry of the card ).

G ) Cheques related arrangements for Nepalese banks:

For depositing the money on self-account through any kind of instruments like:

• Cheque

• Bills

• Pay order

- The banks has to deposit all the money mentioned in the aforesaid instruments in full in the account of customer. 

However, any commission that is to be charged for such services should be separately taken and separately accounted in the vouchers. 

H ) Interest related arrangements for Nepalese banks:

The difference between the two saving accounts of different names are not allowed to be more than 2%. While making any changes regarding the interest rates scheme of saving accounts, the bank must incorporate the changes in such a way that, all the saving accounts have proportionate impact by the degree of changes made.

The difference between the yearly penal provisions of lending fund as per agreement should not be more than 2%. However, while computing the yearly penal provision of lending fund, no banks are allowed to demand excess sum of money than its assured principal or interest for the amount due.

Interest on deposit will be provided even if the deposit account of customer is dormant.

The publication of interest rate is published as yearly interest rate.

I ) Service Fee related arrangements for Nepalese banks:

A ) Service fee related :

The cost of service charged by bank should not exceed the cost to the banks.

For example:

While getting the credit information of customer or Black listing the customer,

Then, the Fees charged by bank on removal from such black listed group- should not be more than the cost to the banks (i.e. fee charged by the credit information department).

Similarly, while providing ATM service, card services, charges for evaluating financial securities, insurance service charge and like, should not be charged more than its cost.

No charges is to be charged by any banks for clearance of cheque of less than Nepalese RS. 2, 00,000, through electronic mode.

b) Administrative fee and guarantee fee related:

Banks are allowed to charge administrative fee for passing loan. But, the administrative fee should be immediately reimbursed on refusal.

All fees are incorporated while computing the interest rate on loans - except administrative fees and guarantee fees.

For passing the loans under same categories, the deviations of administrative cost and guarantee cost should not exceed 0.25 %.

J ) Advance payment related arrangements for Nepalese banks:

• On providing loans the banks has to clearly state advance payment fees for loan transactions. Not to charge any kind of fees by the banks, if the loan holder wants to settle the debts in advance.

• If anyone wants to settle the loans and advances (up to Nepalese rupee 50 lakh or to the excess of its limit ) as an advance payment, due to the change in prior arrangements (related to interest or other agreements ), then, in such a case - no fee is to be charged by the bank. 

• If project loans and advances is taken by the debtor and the bank has changed the agreements (related to interest and other), without consulting the debtor, in such a case , if a debtor wants to settle the loans and advances as an advance payment - then no fee is to be charged by the bank.

K ) Grievance related arrangements for Nepalese banks:

All the Banks has to establish ‘Grievance Handling Desk’ and inform their customers for such facility in order to handle any uncomfortable and problems of their customers. Nepalese banks has established hotlines and online grievance handling portals for managing their customers.

L ) Financial Literacy related arrangements for Nepalese banks:

All the Nepalese banks are compulsorily required to incorporate financial literacy program in its strategic plan. They are required to provide financial information and financial inclusion programs for their customers.

M ) Confidentiality related arrangements for Nepalese banks:

All the banks has to keep the business related details (like, books of accounts, records, financial statements) of their customers secret except required by law.

Note:

Any bank and financial institution acting in contravention to the above is punished as per section 100 of Nepal Rastra bank Act, 2002. 

Road Map of Monetary Policy (2018/19 ) of Nepal

In this blog, 


I have made my sincere effort -to explain the overall monetary policy (2018/19) of Nepal in easy and organized way. 

The central bank is established to formulate necessary monetary policies as well as foreign exchange policies - to maintain the price stability and consolidate balance of payment (BOP) for the sustainable development of country.

Nepal RastraBank being the central bank of Nepal, is governed by Nepal Rastra Bank Act, 2002. Since 2002/03 the central bank has been publicly issuing monetary policy.  In addition to this, the bank releases quarterly and half-yearly review of the policy. However, the necessary amendments in Nepal Rastra Bank Act, 2002 has been made and Nepal Rastra Bank Act, 2016 has been enforced by consolidating the federal structure and other environmental issues.

The new constitution of Nepal, 2015 has changed the federal structure of Nepal. The Federal, state and local governments have been formed. The budget has been announced for 2018/19 on 29 May 2018. The provincial governments has presented their revenue and expenditure estimates in their respective assemblies on 15 June 2018, following the provision of the Intergovernmental Fiscal Arrangement Act, 2017.

Therefore, in the alignment of government budget, studying the global scenario of economic outlook, suggestions from the stakeholders - Nepal Rastra Bank has framed the monetary policy to safeguard macroeconomic and financial stability, widen financial inclusion and achieve targeted economic growth.

Current Economic Scenario of Nepal:

• National macroeconomic indicators (such as economic growth and inflation) are in expected direction.

• The domestic economy is on a positive track. This is reflected by the encouraging economic growth of past 2 years.

• Increase in Imports is posing challenge to stability in external sector.

• The global economy is on a cyclical upswing.

• Prices of several international commodities are rising creating inflationary pressure.

• The monetary policy stances remain mixed at the global level.

• The balance of payments (BOP) is in deficit.

• Imports has exceeded Exports.

Economic Projections of Nepal: 

• Economic growth rate is to be maintained around 8 %.

• Consumer price inflation within 6.5 %.

• The maximum growth of broad money is set at 18 %.

• Domestic credit is projected to grow by 22.5 % and the private sector credit is projected to grow by maximum 20.0 %.

• Mobilization of resource to create employment promotion and entrepreneurial development.

• Maintain interest rate stability.

• Ensure easy access to financial services for all citizens by prioritizing financial inclusion and financial literacy. 

• Use of technology in payment system will be encouraged.

• Ensure adequate foreign exchange reserves to cover the prospective import of goods and services ( at least for 8 months).

• The demand for bank credit has increased since past 2 years. On the one hand, demand for credit has increased, while on the other, the balance of payments situation of the country is in deficit.

• There is a need to increase the loanable fund for attaining higher growth and promote rational allocation of resources for creating an inclusive economy.

• The interest rate on institutional deposits mobilized through auction has soared mainly due to slower growth of deposits relative to credit demand. As this has exerted high pressure on lending rate.

• Make necessary amendments in Nepal Rastra Bank Act, 2002 and Bank and Financial Institution Act, 2017 will be initiated.

• Make necessary policies related to regulation, inspection and supervision for the establishment and operation of infrastructure banks.

• Make necessary arrangements for opening branches of the BFIs to make the banking services further simplified and accessible.

• Establishment of provincial office of all commercial banks in each province.

• The campaign for opening bank accounts of all Nepali citizens within a year will be implemented effectively in coordination with concerned institutions.

• Students at high school and university level will be encouraged to open bank accounts. This will be complemented by financial literacy campaigning.

• The process of establishing Real Time Gross Settlement (RTGS) system has already been initiated. Necessary steps will be taken to establish National Payment Switch/Gateway.

• Encourage merger and acquisition process.

• All commercial banks are required to arrange for institutional rating . Such a rating can be done from national or international credit rating agencies. In addition, commercial banks are required to use the credit rating of the borrower as a basis for credit disbursement and renewal for the loans exceeding Rs. 500 million.

• Development banks and finance companies will be required to prepare their financial statements as per the Nepal Financial Reporting Standard (NFRS). 

• Aggregate demand will increase. This will create inflationary pressure in the economy due to : a ) Increase in expenditure of local, state and federal governments in course of achieving the targeted growth rate. b ) Increase in petroleum prices in the international market. 

Management Policies :

The shift of economy from the current scenario to the above projections, are planned to achieve through following management techniques :

A ) Through Monetary Management Techniques :

• The central bank has been using open market operations (OMOs) as the main instrument of monetary management. OMOs will be conducted on the basis of liquidity in excess of minimum reserves to be kept by the BFIs.

• Use WAIBR (weighted average interbank rate) as the operating target of the interest rate corridor (IRC) system.

• Reduce IRC to 6.5%

• Raise two-week deposit collection rate to 3.5 %

• Trim IRC to minimize the fluctuations in the short-term market interest rate.

• The provision of taking two-week repo rate as the policy rate is unchanged i.e 5% to maintain short term stability in interest rate.

• Reduce cash reserve ratio (CRR) to 4 %.

• Lower the Base Rate.

• Reduce SLR to 10 %, 8% and 7% for A, B and C class of banks respectively.

• Fix bank rate for the purpose of lender of last resort (LOLR) facility to 7%.

• Not required to make a margin call, when the pledged value of shares as collateral for margin lending declines by less than 20 %.

• Allow BFIs to extend their margin lending against the collateral of shares upto 25 % of their core capital.

• Maintain refinance rates as follows :

a) General refinance rate to 4%, special refinance and export refinance to 1%. However, Under this provision, BFIs are allowed to charge a maximum 9 % interest rate on general refinance and 4.5 % on special as well as export refinance.

b) The special refinance is provided at 1 % to promote sick industries, cottage and small industries, small businesses run by dalits, indigenous people, differently-abled individuals and deprived communities. Likewise, the export refinance aimed at encouraging exports is also kept unchanged at the existing rate of LIBOR plus 0.25 % .

B ) Through Credit Management Techniques:

• Allow BFIs (including in Indian currency) including Microfinance institutions to mobilize external borrowing up to 25 % of their core capital.

• Commercial banks to mobilize external loans in convertible foreign currencies up to 25 % of their core capital.

• Make provision for providing hedging facility for the foreign investment in infrastructure projects, pooling the investment amount in a separate fund. The fund will help to manage the foreign exchange risk to be borne by foreign investors. This facility is expected to attract foreign investment in large hydropower projects, transmission lines, roads and other infrastructure projects. A separate provision will be made in this regard.

• The ceiling of personal overdraft loan and revolving type loans extended by the BFIs will be reduced to Rs. 5.0 million. Additional policy provision will be introduced to control personal as well as overall overdraft lending of the BFIs.

• For commercial banks - Atleast 25 % of their total credit must be kept aside for priority sector lending of funds, whereby it must include at least 10 %  in agriculture sector and at least 15 % to energy and tourism sector. 
• However, for the development banks and finance companies -  at least 15 percent and 10 percent respectively of their total credit to priority sector is to be kept aside.

• Commercial banks will be encouraged to extend credit in the priority sectors in all 7 provinces.

• BFIs will be encouraged to provide credit to small and medium enterprises (SMEs).

• The limit of the refinance fund, set up for disbursing concessional credit to the priority sectors, will be increased to Rs. 35 billion.

• Loan to get extended for purchasing public vehicles (operating from renewable energy) under the priority sector lending.

• Commercial banks, development banks and finance companies has been fixed to disburse minimum 5 % of their total credit to the deprived sector for all three types of institutions.

• Loan up to Rs. 1.5 million is extended to the projects that are run by women - against group guarantee, under deprived sector lending. For the development of women entrepreneurship, GoN has provisioned 6 % interest subsidy on such loans.

• Encourage investment in agriculture  by amending the Manual relating to Commercial Farming and Livestock Credit.

• Make institutional rating arrangements for all commercial banks from 2018/19. Such a rating can be done from national or international credit rating agencies by those commercial banks. 

• Use the credit rating of the borrower as a basis for credit disbursement and renewal for the loans exceeding Rs. 500 million. 

• Widen the scope of the deprived sector credit by providing :

a) Certificate based loan under the mortgage of educational certificates.

b) loan to deprived and marginalized sections of the society.

c) loan to students of target group for higher as well as technical and professional education.

d)loans to Dalit Communities (for operating businesses under group guarantee). 

-For this Goverment of Nepal has provisioned 5 % interest subsidy on such loans.

C ) Through Long-Term Interest Rate Management Techniques:

• Reduce the limit for BFIs to accept the fixed deposit up to 15 % of its total deposit liabilities from a single institution . The maximum limit for institutional deposits is kept at 45 % of total deposit liabilities.

• Mobilization of the auction-based institutional fixed deposit at maximum 1% points above of the published fixed tenure deposit rate.

• Encourage BFIs to mobilize financial resources through long-term bonds. Resources raised from bond issuance will be taken into account while computing credit to core capital cum deposit ratio.

• Commercial banks to maintain a spread rate of 4.5 % by mid-July 2019 and the spread rate will be reduced gradually. 

D) Through Foreign Exchange Management  Techniques:

• Extend the term of foreign currency loan up to 180 days to import industrial raw materials through commercial banks.

• Make L/C mandatory to carry out imports : a) from India – exceeding INR 50 million  b) from other countries - exceeding USD 40,000

• Provide Foreign exchange facility up to USD 1000 to travelers traveling abroad- based on travel document issued by the GoN for travelling abroad through the land route.

• Allow commercial banks to act as an agent for managing trilateral agreement, manage Escrow account and provide custodian services to foreign investors making a loan investment in various projects in Nepal. Allow commercial banks to act as an agent for recovery of loan and interest and auctioning of the collateral of defaulted borrowers.

• Allow foreign investors investing in specified industries and projects to borrow local currency against the collateral of their foreign currency deposits at Nepali commercial banks.

• Allow commercial banks to execute confirmation of the L/C for the correspondent banking and trade finance services against the collateral of the foreign currency deposits kept by these banks at domestic as well as foreign correspondent banks.

• A provision will be made whereby goods from third countries could be exported to countries other than Nepal as per international rules and norms through the letter of credit on the basis of the advance payments received from the importer abroad.

• Ease the supply of gold to bullion traders.

• Allow the commercial banks to import gold at any time or at once during the month based on quota for the month.