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Dhungana, B. R. (2011). Overview of finance companies in Nepal. Journal of Finance and
Management Review, 2(2): 241-251, Kathmandu, Nepal.
1
Overview of Finance Companies in Nepal
Bharat Ram Dhungana 1
Abstract
This paper examines the study of macro-economic aspect of finance companies (Non-bank financial
institutions) of Nepal over the period of July, 1990 to October, 2010. The finance companies are still
unable to expand their services in Mechi, Dhaulagiri, Bheri, Karnali and Mahakali zone. Moreover,
almost 70 percent finance companies are concentrated in Bagmati zone especially in Kathmandu
valley. The Nepalese finance companies are ranked in second position in the sense of market share of
total deposit and total lending. The finance companies are holding 8.5 percent market share of total
deposit and 11.3 percent market share of total lending at mid-July, 2010. The overall NPL status of
finance companies are 1.98 percent that reflects the satisfactory situation of the lending policy of
finance companies. There have been some improvements on the non-performing loans (NPL) of
finance companies in the recent years due to the effective regulations and supervision made by the
regulatory agency. The NRB needs to be committed in its work of leading the financial sector
development with the object of creating a sound, healthy and competitive environment in which the
non-bank financial institutions will be able to compete in this globalized market.
Keywords: Finance Company, liberalized economic policy, non-performing loans, regulatory agency
1. Background of Finance Companies in Nepal
The existence of banks and other non-bank financial institutions in a formal and organized way is
collectively known as the financial system of a country. Financial system can be grouped into banking
and non-banking financial institutions. The banking system is made up of commercial banks and
investment banks. Commercial banks are primarily in the business of accepting deposits and extending
credits. The non-banking financial institutions comprise of development banks, finance companies,
saving and credit unions, building societies, discount houses, leasing companies, mortgaged
companies, insurance companies, pension funds and provident funds. Few of these non-bank financial
institutions are also engaged in the business of accepting deposits from the general public. However,
the central authority can impose certain restrictions on accepting deposits by these institutions. Only
commercial banks are authorized to conduct full-fledged banking services.
The other non-bank financial institutions can operate conditional or limited banking services, which
may vary from country to country. Some other non-bank financial institutions such as insurance
companies, pension and provident funds are, sometimes, categorized as contractual saving institutions
and they mobilize savings on contractual basis. Financial institutions, financial instruments and
financial markets are the three interrelated aspects of the overall financial system. A wide variety of
financial institutions may exist in the financial market. Each market serves a different set of customers
or deals with a different type of security. A financial market is a place where all financial securities or
instruments and financial services are transacted or exchanged and serviced. Financial institutions help
to mobilize savings by issuing liabilities in form of different types of financial instruments (Paudel,
2005).
Finance companies are the non-depository financial institution that does not accept deposit like
commercial banks. Generally, they are set up to provide credit to households or firms, usually to
finance the purchase of appliances or equipment. They are non-banking financial institutions that
provide credit facilities to households and businesses. For households, they originate loans and leases
to finance the purchase of consumer goods such as automobiles, furniture, and household appliances.
For businesses, they supply short- and intermediate-term credit (including leases) for such purposes as
the purchase of equipment and motor vehicles and the financing of inventories (Kohn, 2007).
Finance companies are the financial institution that supplies credit for the purchase of consumer goods
and services by purchasing the time-sales contracts of merchants or by granting small loans directly to
consumers. Specialized consumer-finance agencies now operate throughout Western Europe, Canada,
1 Mr. Dhungana is Lecturer, School of Business, Pokhara University.
Dhungana, B. R. (2011). Overview of finance companies in Nepal. Journal of Finance and
Management Review, 2(2): 241-251, Kathmandu, Nepal.
2
the United States, Australia, Japan, and some Latin American countries. Although they existed in the
early 1900s, their greatest development came after World War II.
Finance is the linchpin of any development strategy. Prior to the mid-eighties, finance markets in Nepal
were characterized by barriers to entry. The development in this sector actually took place in the mid-
1980s with joint venture banks entering the Nepalese financial market reversing the monopoly of state
owned banks. The licensing of non-banking financial institutions (NBFIs) in 1984 marked, with lower
capital requirements, the need for more players in the market to avail access of services to the public.
However, the actual proliferation of finance companies did not commence until the mid-90s (Aurora,
2007).
Financial institutions of 'B', 'C', and 'D' class are allowed to carry out inward remittances, companies of
B and C class can purchase and sell Indian Currency, whereas B class national level financial
institutions can accept foreign currency deposits, buy and sell foreign currency, provide exchange
facilities against passport & open foreign currency accounts. 'B' and 'C' class financial institutions can
act as co-agent of licensed commercial banks to issue debit and credit card in Nepalese and Indian
currencies while 'B' class financial institutions (other than national level) are allowed to buy foreign
currency and sell it to NRB and/or/ to commercial banks. Development banks and financial institutions
can operate automated Teller Machine (ATM) under specified directives. Policy decision is made for
'D' Class financial institutions carrying retail banking transactions, remaining within the given
conditions, to mobilize public deposit. Likewise, those national level "C" class finance companies
meeting the set criteria can avail safe deposit vault and locker facilities (Economic Survey, 2009/2010).
A healthy financial system is the one that effectively fosters resource mobilization for capital
accumulation and determines efficient allocation of resources. It is important to remember that success
of any financial system, in its resource mobilization and allocation functions, depends on its ability to
offer the public a variety of assets (money as a medium of exchange, earning assets, pension funds,
etc.) corresponding to the various needs and preferences of economic agents. A clear understanding
and recognition of this fact is very important to formulate appropriate policies to enable the financial
system to function properly and efficiently. The test of the strength of a country's financial sector is its
capability to make available the appropriate types of institutions and financial instruments that can
support economic growth. The NRB’s challenge is to build up a financial system that is supportive of
growth, and dynamic enough to change and fulfill the evolving demands of a real economy (Panta,
2009).
Nepalese financial system has witnessed a rapid growth both in terms of quantitative and qualitative
aspects. Growing share of total credit, total assets and other measures of financial development
indicators can prove this fact. Notwithstanding this fact, there are mixed empirical findings about the
role of financial development indicators on economic growth; this study tried to determine the
relationship with economic growth of Nepalese economy over the period FY 1975 to FY 2007. For this
purpose, the study selected per capita real GDP as a measure of growth and four proxies of financial
development indicators (A Joint Study of EAD and FID of Nepal Rastra Bank, 2009).
The history of the finance companies began with the establishment of the Nepal Housing Development
Finance Company Limited in 1992. During the period of 1993, seven finance companies were
established. There was a rapid growth of finance companies in 1994 & the total number of finance
companies became 28. The tendency of establishment of finance companies has been continuously
increasing & coming to the mid October, 2010, the total number of finance companies has been 79.
These institutions have all commenced operations over the past six years since the Finance Company
Act was promulgated. The Act permits these companies to offer installment credit for the purchase of
vehicles, equipment, or durable household goods, for purchase or construction of residential buildings,
for leasing financing, and for operating industrial, commercial or other enterprises. Majority of the
finance companies have their corporate offices in the Kathmandu Valley, and a very few are operating
outside the Valley.
It was the Finance Companies Act (2042) that governed the operation and limitations of finance
companies. It allowed finance companies to take deposits from the people and institutions and make
investment on hire purchase, housing industry, commerce etc. In effect they were allowed to operate as
mini banks. Some eight years later the Merchant Banking Act 2050 allowed certain finance companies
that met the regulatory requirements to acquire merchant banking license. As of 2007 data there are 8
Dhungana, B. R. (2011). Overview of finance companies in Nepal. Journal of Finance and
Management Review, 2(2): 241-251, Kathmandu, Nepal.
3
non-banking financial institutions (NBFI) with merchant banking license. This has been from the
beginning till date the only major difference between a commercial bank and finance company in terms
of the activities allowed to them. The only areas reserved for the commercial banks are: over drafts,
personal loans, foreign exchange except Indian currency, and opening letters of credit (Pandey, 2009).
The finance companies are allowed to transact also in Indian currencies though they are still restricted
to transact in other foreign currencies. In order to govern this sector more prudently the Banks and
Financial Institutions Act 2061 (also known as the Umbrella Act) replaced all other earlier acts thus
making this the single Act that governs all financial sector players from commercial banks and finance
companies. The banks and finance companies are divided into various categories fixing the extent of
services based on capital. The players with the highest capital base are commercial banks and they
were given a class “A” category; development banks a class “B” category, finance companies a class
“C” category and micro-financing institutions and cooperatives were given a class “D” category.
Products and services were allowed according to the class the institution belonged to. Although this has
been in line with the principle of prudential regulation factor and it has enabled the Nepal Rastra Bank
to incorporate all the formal players in the financial sector under its regulatory jurisdiction, the purpose
of making financial services endemic has not materialized. All it has done is that it has divided up the
number of players into capital structured groups. The Umbrella Act along with the prudential
regulations of the Nepal (Economic Survey, 2009/2010).
In 1985, the Finance Companies Act was enacted in order to allow finance companies to enter the
financial system. This was done with the objective of serving small borrowers and meeting the demand
for consumer credit. But this Act could not produce the desired response in the market, as the Act was
not clear and transparent. Only one finance company was established under the government sector in
1989. To make the Act clear and transparent, the Finance Company Act 1985 was amended in 1992.
Following this amendment, there has been a very fast growth in the establishment of finance companies
(Shrestha, 2005).
Financial sector in Nepal has shown better performance relative to other sectors in the economy. The
economic reforms initiated by the Government in 1990s have changed the landscape of several sectors
of the Nepalese economy. As a result, several banks and financial institutions have been providing
financial services in different region of the country. But whatever the commercial banks are established
in the nation, they are highly concentrated in Kathmandu valley & other major cities of the Nepal. The
central development region has located more than 50% branches of commercial bank where as far
western development region has only 5.49%. Moreover, one third of the branches of the commercial
banks were located in Kathmandu valley where as 26.09% in the hilly areas & 40.43% in the terai areas
till the mid-April, 2010 (Dhungana, 2010).
2. Growth and Position of the Banking and Non-Banking Sector in Nepal
There has been a rapid growth of financial institutions in Nepal over the last two and half decades. At
the beginning of the 1980s when financial sector was not liberalized, there were only two commercial
banks namely Nepal Bank limited (NBL) and Rastriya Banijya Bank (RBB) and two development
banks namely Agricultural Development Bank, Nepal (ADBN) and Nepal Industrial Development
Corporation (NIDC) performing banking activities. There were no micro-credit development banks,
finance companies, cooperatives and NGOs with limited banking transactions. Finance company was
established only from the 1992 AD in Nepal whereas micro-credit development bank was established
only from the 1993 AD. Similarly, NRB licensed cooperative & NGOs were established only from
1994 AD in Nepal (Dhungana, 2010).
2.1 Position of Financial Institutions
The number of 'A' class commercial banks reached 29, 'B' class developmental banks 83, 'C'
class finance companies 79, and 'D' class micro-credit development bank institutions (MFIs)
19, NRB licensed cooperatives 16 & NRB licensed NGOs 45 by Mid-October, 2010.
Dhungana, B. R. (2011). Overview of finance companies in Nepal. Journal of Finance and
Management Review, 2(2): 241-251, Kathmandu, Nepal.
4
Figure 1: Position of Financial Institutions in Nepal.
Source: Banking & Financial Statistics, NRB, Mid October, 2010.
2.2 Geographical Disbursement of Finance Companies
The scenario Nepalese finance companies reflect that the accessibility of finance company in different
geographical boundaries as per the zone wise analysis seems to be very unbalanced. During the period
of 1995, the services provided by the finance companies were concentrated only in Bagmati, Narayani,
Lumbini & Gandaki zone. The finance companies are able to expand their accessibility to the
additional five zones till the mid April, 2010.The position of finance companies in mid April, 2010
shows that 70% finance companies are located in Bagmati zone, especially in Kathmandu valley. The
finance companies are still unable to expand their services in Mechi, Dhaulagiri, Bheri, Karnali &
Mahakali zones.
Figure 2: Zone Wise Distribution of Finance Companies in Nepal.
Source: Quarterly Economic Bulletin of NRB, Mid April, 2010.
Commercial
Banks, 29
Development
Banks, 83
Finance
Companies, 79
Micro-Credit
Development
Bank, 19
NRB Licensed
Cooperatives, 16 NRB Licensed
NGOS, 45
Mechi
0%
Koshi
3%
Sagarmatha
3%
Janakpur
1%
Narayani
9%
Bagmati
70%
Gandaki
6%
Dhaulagiri
0%
Lumbini
6%
Rapti
1%
Bheri
0%
Karnali
0% Seti
1%
Mahakali
0%
Finance Companies in Mid April, 2010
Dhungana, B. R. (2011). Overview of finance companies in Nepal. Journal of Finance and
Management Review, 2(2): 241-251, Kathmandu, Nepal.
5
2.3 Sector Wise Outstanding Credit of Finance Companies
Finance companies are set up with the objective of providing credit facilities to the households or
firms, usually to finance the purchase of appliances or equipments. Generally, they originate loans and
leases to finance the purchase of consumer goods such as automobiles, furniture, and household
appliances to the households & they supply short- and intermediate-term credit (including leases) for
such purposes as the purchase of equipment and motor vehicles and the financing of inventories.
So far as sector wise outstanding credit of finance companies of Nepal, 32% loan is made for the
finance, insurance & fixed assets whereas other sector has occupied 28% loan. The finance companies
has maximum invested their funds toward the finance, insurance & fixed assets as a loan & second
priority has been seen to the other sectors. Similarly, the flow of loan has been made by the finance
companies to the construction sector (i.e.15%) & 8% for the wholesale & retailer business. It is obvious
from the figure that the lowest flow of the outstanding credit provided by the finance companies is for
the agriculture sector, mines sector & local government which is less than 1%. The investment toward
consumable loans, transportation, communication & public services remain the 5%. The production
sector has occupies the 3% outstanding credit where as the metal production, machinery & electrical
tools & fittings & transportation equipment production & fittings has 1%.
Figure 3: Sector Wise Outstanding Credit of Finance Companies.
Source: Banking & Financial Statistics, NRB, January, 2010.
2.4 Total Deposits & Total Lending of Finance Companies
The deposit and lending of banks and financial institutions have been constantly growing in proportion
to GDP. The gradual increase in deposit by 68.0 percent and lending by 51.6 percent by July 2009
shows the deepening of the financial sector (Economic Survey, 2009/2010). Commercial banks' share
has reached to 83.5 percent in deposit while lending has reached 77.8 percent of the total banking
activities by July 2009. Finance companies have been ranked in second position that occupy 8.5%
Agriculture
0%
Mines
0%
About Production
3%
Construction
15%
Metal Production,
Mechinery&
Electrical Tools &
Fittings
1%
Transportation
Equipment
Production &
Fittings
1%
Transportation,
Communication &
Public Services
5%
Wholesalers &
Retailers
8%
Finance, Insurance
& Fixed Assets
32%
Service Industries
2%
Consumable Loans
5%
Local Government
0%
Others
28%
Sector Wise Outstading Credit of Finance Companies
Dhungana, B. R. (2011). Overview of finance companies in Nepal. Journal of Finance and
Management Review, 2(2): 241-251, Kathmandu, Nepal.
6
market share of total deposit & 11.7% market share of total lending in mid July, 2010. But the
development banks are ranked in the third position in the sense of market share of total deposit & total
lending. Besides, shares of transactions of development banks conducting micro finance activities, and
governmental and non-governmental organizations with limited baking activities are very low.
During the eleven months of 2009/10, the deposit mobilization of the class "C" finance
companies increased by 24.8 percent to Rs 71.23 billion compared to Rs 57.8 billion at mid-
July 2009. Similarly, loans and advances of the finance companies also increased by 27.4
percent and stood at Rs 76.39 billion at mid-June 2010 compared to Rs 59.94 billion at mid-
July 2009. (Monetary Policy, 2010)
Figure 4: Market Share of Total Deposits.
Source: Economic Survey, 2009/2010
Market Share of Total Lending (%)
Figure 5: Market Share of Total Lending.
86.30% 83.70% 83.50%
3.90% 5.10% 7.10%
8.80% 10.30% 8.50%
1% 0.90% 0.90%
2007 2008 2009
Market Share of Total Deposit
Commercial Bank Development Bank Finance Companies Other Institutions
79.50% 78.30% 77.80%
5.30% 6.00% 8.30%
12.20% 13.20% 11.70%
3% 2.50% 2.20%
2007 2008 2009
Market Share of Total Lending (%)
Commercial Bank Development Bank Finance Companies Other Institutions
Dhungana, B. R. (2011). Overview of finance companies in Nepal. Journal of Finance and
Management Review, 2(2): 241-251, Kathmandu, Nepal.
7
Source: Economic Survey, 2009/2010
2.5 Sources and Uses of Funds of Finance Companies
The aggregate resources of finance companies have reached Rs. 99,380 million with a growth of 13.7
percent as compared to the Rs 87,430 million by July 2009. Deposit as the major source of such
finance companies has reached to Rs 66,990 million marking a growth of 17.4 percent during the
review period. Similarly, the capital funds for these companies increased by 44.1 percent arriving at Rs
15,180 million while the credit Rs 5,190 million with one 1.0 percent growth. 4.34 On the uses side of
the fund, loan and advances of finance companies has increased by 17.9 percent to Rs 70,810 million
between mid-July 2009 and mid-January 2010. This sum stood at Rs 60070 million by mid-July of
2009. There has been a higher growth of 74.6 percent worth Rs 5,700 million in investment in the
review period. The liquid asset, however, has declined by 13.5 percent and limited to Rs 14,180 million
by mid-January 2010 (Economic Survey, 2009/2010).
Figure 6: Deposits, Loans and Advance of Finance Companies.
Source: Banking & Financial Statistics, NRB, January, 2010.
2.6 Status of Non-Performing Loan (NPL) of Finance Companies
The Nepal Shreelanka Merchant Banking & Finance Ltd. has the highest percent of NPL
i.e.59.84% that reflects the poor performance regarding the loan management. High level of NPL
blocks the financial institutions' resources in unprofitable segments because it requires higher loan loss
provision that reduces the fund for new lending. Similarly, high level of NPL in the financial sector
hinders the economic growth & impairs the economic efficiency of the country itself as it reduces the
institutions' capacity in providing fresh fund for new projects. As a result, the higher degree of NPL
limits the financial institutions' capacity to honor the depositors claim on demand & if the finance
company fails to provide money on demand, the public will lose faith & confidence over the finance
company. The regulatory agency should take immediate action over such finance companies regarding
to control the status of NPL that helps to win the public confidence.
Another higher NPL status of finance companies is CBM Finance Company having 28.35% NPL. The
NPL status of Investa Finance Limited has 17.66% whereas the Arun Finance & Saving Company
Limited has 13.33%. The Gorkha Finance Limited, Merchant Finance Company Limited & Janaki
Finance Limited have the NPL status having the range of 5 to 10%. The setti Bittiya Sanstha Limited,
Manjushree Financial Institutions Limited, Swostik Merchant Finance Company Limited, Jebil's
Finance Limited, Reliance Finance Limited & Mercentile Finance Company Limited do not have the
availability of NPL status. Remaining finance companies have less than 5% NPL status.
There have been some improvements on the non-performing loans of finance companies in recent
times due to effective regulations and improved supervision by NRB, strong actions being taken
0
100000
200000
300000
400000
500000
600000
700000
800000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Deposit (Rs. hundred
thousand)
Loans & Advances (Rs.
hundred thousand)
Dhungana, B. R. (2011). Overview of finance companies in Nepal. Journal of Finance and
Management Review, 2(2): 241-251, Kathmandu, Nepal.
8
against the willful defaulters, and finance companies' own willingness to stand themselves as efficient,
capable and competitive entities in the current huge competitive environment. The total loan, total NPL
& NPL status of finance companies in mid-July 2009 was Rs.7,373,60,23,740, Rs.146,24,35,440 &1.98
percent respectively.
3. Concluding Remarks
The C class financial institutions (Finance Companies) are still unable to expand their services in
Mechi, Dhaulagiri, Bheri, Karnali & Mahakali zones till the mid April, 2010. It means that their
services have been confined within the nine zones only. Moreover, the position of finance companies in
mid April, 2010 shows that 70% finance companies are concentrated in Bagmati zone whereas
remaining 30% have been scattered over the eight zones. It can be concluded from the above fact that
there is no regional balanced development & expansion of Nepalese finance companies
The Nepalese Finance Companies have occupied the second position out of total financial system in
terms of market share of the total deposit as well as total lending. The commercial banks are able to
hold first position of market share of the total deposit & lending where as development banks lies in the
third rank. The NPL status of the some finance companies (such as Nepal Shreelanka Merchant
Banking & Finance Ltd. and CBM Finance Company ) has very high that hinders the economic
growth & impairs the economic efficiency of the country itself as it reduces the institutions' capacity in
providing fresh fund for new projects. The regulatory agency should monitor & inspect the
performance of the finance companies periodically & corrective actions should be taken if necessary to
safeguard the finance companies from the failure. The finance companies should create public
confidence among the people that encourage depositing their savings.
Finance companies are considered as an important non-banking financial institutions that support
economic development of the nation through the supplying the funds for the promotion of the sectoral
development like agriculture, industrial, mines, transportation, communication, public health & so-on.
The agriculture, mines & production sectors have got low priority of the outstanding loan made by the
finance companies but finance, insurance & fixes assets, other sectors and construction sector have got
highest priority. The finance companies should give proper attention regarding their sector wise
investment that how the objectives of finance companies can be fulfilled. Moreover, the government &
regulatory agency should encourage the finance companies to make rational investment in the priority
sectors that may help to enhance the national economy.
The finance sector has shown maturity in recent years. The positive trend is also due to the strict
regulatory guidelines. However, innovation in this sector is lacking. In order to be competitive in this
market, finance companies need to collaborate and start thinking and planning mergers to create a
larger capital base. The globalization and internationalization of financial market, the complex
financial systems within the country and the emerging needs for better and quality service require NRB
to be innovative, dynamic and effective. All Institutions in the financial sector should move towards
achieving a common goal of making the financial sector sound, prudent, efficient and effective. The
NRB needs to be committed in its work of leading the financial sector development with the object of
creating a sound, healthy and competitive environment in which the non-bank financial institutions will
be able to compete in this globalized market.
Dhungana, B. R. (2011). Overview of finance companies in Nepal. Journal of Finance and
Management Review, 2(2): 241-251, Kathmandu, Nepal.
9
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