E-Kantipur

JUL 03 -

The domestic financial sector is reeling under a liquidity crunch. And, after the cases of financial embezzlement in a few finance companies, depositors’ confidence in the banking system has hit an all-time low. The Kathmandu Post talked with some of the key players of the country’s financial system on the extent of the crisis and possible solutions. Excerpts:

We will restore confidence in the system

Maha Prasad Adhikari

Deputy Governor, Nepal Rastra Bank

Crisis is yet to come to the financial sector. This is a problem not a crisis. A few institutions are in crisis, but not the whole system.

Latest central bank statistics show that deposits in banks and financial institutions (BFIs) have not declined. Commercial banks currently have deposits of Rs 656 billion, development banks have Rs 90 billion and finance companies have Rs 84 billion. Foreign reserves too have increased.

The present problem is a result of bad corporate governance, unbalanced portfolio and carelessness in risk management.

We will definitely punish those institutions involved in malpractices. If those involved in financial embezzlement were punished in the past, situation would have been much better now. Our policy is to punish the culprit but save the institutions because we are serious about depositors’ money. The Nepal Rastra Bank (NRB) will help revive an institution if it is solvent, but if it is not, NRB can’t inject liquidity in it.

We are observing the issue seriously. We are committed to the system and we will restore depositors’ confidence through whatever means necessary. We are currently conducting a research with the help from the International Monetary Fund (IMF).

NRB will provide special refinancing against good loans by staying within its limit. As soon as FIs ask for refinancing, we look after their portfolio and provide liquidity as per our policy. We have learned three lessons from the present problem. First, it has encouraged mergers. Second, there is a possibility of money coming from the informal to formal sector. The third one is maximum exposure in the realty sector. Earlier, nobody listened to us when we cautioned them about investing heavily in a single unproductive sector. Now they have learnt the lesson.

Merger the long-term solution

Hari Roka

Lawmaker, UCPN (Maoist)

There are five to six major reasons behind the current problem. First one is the structural one. In our financial system, 300 families have taken 80 percent of the total loan and 150 of them are FI promoters. Organisational structure of FIs is the other problem which has created a conflict of interest. Third one is the administrative, which even bankers have admitted. The fourth one is the investment portfolio. Almost everyone has invested in the areas that can yield quick returns. 

There is a difference between banks and industries. If an industry is sick, it can be sold, even for scrap. But once the liquidity goes out of banks, it is not that easy to get back the liquidity. In the last eight to 10 years, BFIs were allowed to invest anywhere. And, that created problems. Even the central bank failed to identify it. We have to look for structural changes in the new Banking and Financial Act. The central bank’s current measures to ease the liquidity crunch are good for a short period. However, as a long-term measure, we should go for mergers. The merger bylaw is not enough. The central bank and the government should come up with more incentives.

Restructuring is needed

Ashoke SJB Rana

President, Nepal Bankers’ Association

Bad corporate governance coupled with an unnecessarily high number of FIs led to the present situation. In the last four years, too many FIs entered the market. Earlier, A, B and C class financial institutions had their own markets. But of late, all of them are concentrating in the realty sector. And, deposit growth, which was increasing at 20 percent, started to decline.

Earlier, FIs used to start with low paid-up capital and they took time to grow. The regulator upped the minimum capital requirement to check the entry of new institutions. However, it didn’t stop new FIs from entering the market. Instead they came with larger capital bases and were aggressive in lending right from the beginning. The sole reason behind that was to earn fast profit. This lead to some compromises on corporate governance.

The problem actually started two years ago when there was a shortage of bank notes during Dashain. Of late, the realty sector is struggling. The central bank was late to inject liquidity in the system which further increased the problem. We have requested the central bank to allow us to restructure realty loans. These kinds of facilities were given to the hotel industry during the conflict. However, for a long-term solution, FIs must go through mergers.

Address through monetary and fiscal policies

Jhapat Bohora

Immediata Past President, Development Bankers’ Association Nepal

A combination of several factors has created the current situation. In my point of view, some of the factors are political instability, depositors’ declining confidence in BFIs, lack of financial discipline, low interest rates in the past and unhealthy competition among BFIs.

Earlier, interest rates were low, deposits were easily available, rules and regulation didn’t stop from lending and there was political instability. So, everyone invested in the real estate and the share market.

Even BFIs didn’t adopt a far-sighted approach. They accepted deposits maturing in six months, and invested in two to three year-long project.  NRB should conduct a study and decide on loan restructuring and rescheduling. The current problem should be addressed through fiscal and monetary policies. As a long term solution, the budget should address the problem through relief packages and even assure of bailouts.

We should look for a long-term solution

Rajendra Man Shakya

President, Nepal Finance Companies’ Association

Of late, finance companies are worst hit by the liquidity crunch. Other financial institutions (FIs) are also not untouched, though.

The crux of this liquidity crunch is the loss of depositors’ faith in BFIs. Cases of irregularities, bad governance and promoters’ greediness in some financial institutions have further dented depositors’ confidence.

Due to various reasons, FIs invested heavily in the real estate sector. And, now we’re suffering from the high loan exposure to the realty sector. With the central bank asking BFIs to limit their lending exposure to the realty sector, we have to reduce it in a short time.

Misdeed of a few players has hit the system hard, with even good institutions suffering from it. We all are earning and paying taxes from the depositors’ money. Hence, we should not keep them in anxiety.

Only those involved in wrongdoings should be punished severely. We have been requesting to the central bank and the government for the refinancing facility. We are also trying to work with commercial banks. However, it is difficult to get refinancing even against good loans. We must look for a long-term solution.

The central bank and the state should create conducive environment for us to operate smoothly.

Posted on: 2011-07-03 09:03

Post Your Comment

Please note that all the fields marked * are mandatory.
* Full Name
* Address
* Email Address
* Comment
* Captcha	Get another CAPTCHA code
Note:	Comments containing abusive words or slander shall not be published.