Wednesday, December 26, 2012

The state of cooperatives in Nepal

The financial sector in Nepal is still adjusting to the jolt it experienced after the decline in real estate and housing prices in mid-2011, triggered by slowdown in remittances growth as a result of global economic slowdown. Several corrective measures by NRB and MoF have been fairly successful in containing the situation for now. Note that the core structural, governance and operational problems of the BFIs remain the same. Minor adjustment is not the way to sustainable financial sector in Nepal. More here.

Anyway, beyond the developments in the BFIs, the activities of cooperatives have largely been ignored. Since the NRB is not mandated to supervise and monitor cooperatives, the Department of Cooperatives— which severely lacks technical capabilities and resources—is facing a hard time managing them. Bankers and government officials are worried that the risky deposit and lending activities of cooperatives might hit the whole financial sector hard.

A lot of information is still muddy due to the lack of clear and consistent data on the activities of cooperatives. Better understanding of the nexus between BFIs and cooperatives, lending activities, risk portfolios, state of NPLs, operational efficiency, viability and sustainability is urgently needed in order to not only avoid a potential financial turbulence, but also to ensure an improved access to finance, and inclusive growth and development.

The chart and table give an initial grasp of the state of cooperatives in Nepal. Nearly half of the cooperatives are Savings and Credit co-ops (whose share of total lending and deposits is 78.78% and 70.52% respectively). And, almost 20% of co-ops are in Kathmandu Valley. Most of their lending is in real estate and housing sectors and loans are usually given without satisfying internal due diligence process.

The table shows the financial state of cooperatives vis-a-vis the BFIs. Its amazing that cooperatives have larger deposit and lending volume than development banks and finance companies.

State of cooperatives and BFIs in FY2012
Financial institution Deposit (Rs bn) Lending (Rs bn)
Cooperatives (2012) 139.54 134.03 26501
    Bhaktapur 6.07 6.13 525
    Lalitpur 13.52 13.25 929
    Kathmandu 80.55 60.22 3578
BFIs (mid-July 2012) 1071.39 779.56 213
    Commercial 867.99 612.32 32
    Development 127.3 100.61 88
    Finance 76.14 66.63 70
    Microcredit 5.18 17.75 23

The proliferation of cooperatives (about one cooperative per 1000 people) and their lending concentration in sectors that might see drastic price adjustments (or is happening right now) could trigger a financial crisis within this loosely regulated semi-banking sector. Worse, the crisis might seep into the BFIs (Class A, B and C institutions) and eventually the real sector. Uncertain times ahead for the financial sector in Nepal!