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Banks face credit, liquidity risks, says IMF
KATHMANDU, JUL 08 -
Nepal’s banking system carries high credit and liquidity risks with some banks facing a high solvency risk, said the International Mone-tary Fund (IMF) in its latest assessment report on Nepal’s economy.
Banks are significantly exposed to the assets market, in particular real estate, that has a high probability of bursting, and it has already begun with deterioration in
the real asset quality. A large portion of the banking sector is exposed to liquidity risks given the slowed deposits growth and high credit and deposit ratio.
However, Nepal Rastra Bank (NRB) said that these risks have slowed down with the recent improvement in the both
liquidity and C/D ratio. A senior NRB official said that deposits of commercial banks also grew close to Rs. 600 billion and the C/D radio dropped to below 85 percent.
Even then the existing C/D ratio is the highest in South Asia where the average C/D ratio stands at 60-70 percent.
“Nepal’s liquidity position is vulnerable to standard shocks,” the IMF report said. With a daily deposit withdrawal rate of 8-10 percent, all the banks would fail to meet the statutory liquidity ratio (SLR) of 8 percent of total domestic deposits after two days, and five to nine banks would become illiquid within three to five days.
However, Sashin Joshi, president of Nepal Bankers’ Association (NBA) said that the banking sector of any country would face a crisis in case 8-10 percent of the deposits were withdrawn on a daily basis.
In this scenario, the IMF said liquidity management had been the major challenge. A NRB investigation of 10 banks a few months ago also recorded poor liquidity management at all of them. Although a 25.4 percent average liquid assets in 2009 is considered satisfactory, its ratio has been decreasing over the last five years due to increased lending compared to deposits.
The IMF also said that soaring real estate investment and current account deficit had signifcantly increased the probability of a real estate bust. Nepal’s probability
of suffering a real estate bust is
estimated to rise by 19 percent points from the unconditional probability of 15 percent, according to IMF’s stress tests.
The IMF said that a realty bust would be too costly for Nepali banks. “A 30 percent fall in real estate prices could affect a majority of the loans portfolio as most loans were issued in recent years and collateralized with real estate at inflated prices,” it said. As a result, non-performing loans of banks could rise by more than 20 percent points and reduce the capital of 14 private banks to below the minimum capital adequacy ratio.
Joshi however, said that with the measures taken to discourage lending in the real estate sector, realty prices may come down to some extent, but there was no probability of prices crashing. The banks should reduce their real estate and housing exposure to 40 percent within the current fiscal year.
Another risk highlighted by the report is bank promoters pledging their promoter shares as collateral for commercial loans. “Given the fungible nature of money, such lending practices put banks’ capital at risk,” it said.
The pledging of promoter shares has been sizeable with promoters of 10 banks pledging 20-90 percent of their shares, according to the IMF. For this reason, it said the depletion of capital could be significant and would severely limit the banks’ buffers against loss.
NRB is also seeking to restrict such practices, but it has been delayed due to protest from banks when the central bank first put the condition that it would not refinance banks involved in such practices in its recent refinancing policy. “We will probably make certain provision to discourage such practices in new monetary policy,” said the NRB official.
Posted on: 2010-07-09 08:52
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