Interest Rate Spread

It is possible to reduce the IRS to some extent by increasing operating efficiency in the banking sector through reducing overhead costs and the proportion of NPL could contribute in reducing IRS and strengthening of capital market could be an alternative mode of mediating private savings, and in this way
it is possible to make the sector more competitive in the medium-to-long run. Moreover, even after following the financial liberalisation thesis for more than decades, wide disparity exists between

rural and urban communities in terms of financial inclusion.The avowed strategy of government in promoting financial inclusion has witnessed little realisation as private and foreign banks have made hardly any progress in setting branches in remote and rural areas of the country though they
control almost 75 per cent of the banking sector. For example, between February 2008 and December 2012 the percentage of branches of bank in rural areas decreased from 57.94 to 57.20 percent, whereas the share of branches of bank in urban areas increased from 42.06 to 42.80 percent. Disparity also exists
between the level of commitment of state owned commercial banks and that of private and foreign commercial banks. As of December 2012, for example, 63.97percent branches of state owned commercial banks were located in rural areas, as opposed to only 38.08 percent branches of private commercial banks. The foreign banks have yet to establish any branch in rural areas as of December 2012. Reduction in growth of credit is affecting the trends of investment of the country. Especially, as the savings investment gap might increase in the upcoming fiscal years, the channeling of private investment becomes critical. Problem of banking sector is widespread and is not related to
banking system only. The regulatory entity should be independent but accountable. Prudential regulation should be limited to deposit-taking institutions and should be clearly separated from non-prudential regulation. The problem of lower profitability of bank is that it might reduce the tax and thus make a trace on fiscal system where bank is the number one source of tax under large tax unit of
NBR. Moreover, the revenue target may face hurdle from another side where lower growth of credit may affect investment and growth, and thus tax collection. Although liberalisation policy has been pursued for years, the result is still far from the expected ones .Interest rate is still too high (above 15 percent) which is not favourable to business entities. In addition, the target of financial inclusion has not
been facilitated by this avowed policy. Therefore, channeling sufficient loan to productive sectors and
investors should be a major aim of the reform activities. Additionally, non-performing loans need to be e focused exclusively in an efficient and creative way. A medium- to longterm financial sector strategy should be developed that lays out further reforms based on previous reform experiences. The sector has been facing several problems in terms of low profitability (return on Asset (ROA), return on Equity (ROE) and non-performing loan (NPL)) after 2010. In 2011 and 2012, the situation continues worsening and projection reveals that in 2013 it might further deteriorate. Furthermore, several loan scams occurred in this sector but no proper action is taken yet. So steps should be taken to make the banking sector stable; otherwise country might miss the target of revenue collection because a large amount of tax comes from this source. An effective legal framework provides the central bank with necessary power for improvement in supervision and regulatory capacity, and streamlining of enforcement of
prudential guidelines.

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