Analysis: Govt waking up to financial mess
KATHMANDU, JUN 11 -
Two financial institutions suffered an acute liquidity shortage this week. The government asked institutional investors not to withdraw their deposits for the time being Nepal Rastra Bank eased refinancing facility.
These were major news stories that appeared in leading dailies in the past few days. The first one shows that the banking system is reeling under a severe cash crunch while the other two are government initiatives to address the situation.
Banks and financial institutions (BFIs) are currently battling the twin problems of liquidity crunch and loan recovery. Never before has the country’s financial sector faced multiple challenges at the same time.
What has led to this situation? And who all are responsible for it? To pick out one factor would be difficult. It is a combination of several factors—mainly, reckless lending to the realty sector, the greed of promoters and their increasing interference in the management of their banks, Nepal Rastra Bank’s (NRB) inconsistent policy measures and indiscriminate licensing of new banks.
Political parties also played their part by squabbling over the government’s annual budget and delaying its release leading to development spending falling to an all-time low this year. The government has been able to spend only Rs 45.48 billion, out of the total allocated capital expenditure of Rs 102.61 billion.
All the BFIs are in a tight liquidity position with slow deposit growth and rising loan defaults. So severe is the liquidity problem that some banks have virtually stopped lending, and its effects are best seen in industries that rely on borrowings. The automobile sector, which needs heavy bank financing, has almost stopped vehicle imports. Auto dealers say their sales have slumped 27 percent compared to this period last year. The same is the case in the housing sector and the capital market. The stock market has hit an all-time low. Shares of some BFIs are now at the par value of Rs 100. The banking sector is more nervous about its failure to recover loans due to a slump in the realty sector. With land prices and the real estate business in a deep downturn, loan defaults are said to have reached an alarming rate. This is substantiated by the latest figures of the Credit Information Bureau (CIB) that keeps records of borrowers blacklisted by BFIs. According to the CIB, 211 firms and individuals have been blacklisted as of June 3, compared to 65 during the same period last year. Many BFIs are restructuring loans in a bid to avoid additional provisioning for defaulted loans and to show that their books are safe.
But that has aggravated the problem. Many bankers privately admit that there is a high probability of some financial institutions going bust and many others getting in serious trouble by the end of the fiscal year (mid-July) when banks issue their annual results. “The real picture will come out by the end of this fiscal year,” the chief executive of a leading bank said. “That is the time when the banks go for the annual audits.”
Admitting that some NRB polices might have had negative impact on the banking sector, NRB board member Bishwambher Pyakuryal said the central bank should now think of wider ramifications while introducing policies.
“Of late, the central bank’s role has been limited to issuing licenses and giving stringent directives to BFIs,” said Pyakuryal. “Timely supervision of BFIs and strengthening human resource took a back seat.” For example, there was no inspection at People’s Finance in the last two years. The company was on the verge of liquidation this week.
To some extent, banks are to blame for the mess. “They neither had plans for liquidity management nor tried to control the trend of excessive lending during the real estate bubble,” said a senior NRB official. Despite the central bank’s directive to control the credit-to-deposit ratio (CD ratio) to 80 percent, many have crossed that limit. This is to allow cushion cash deposit in the banks at all times. Bankers say neither the government nor the NRB is seeing the gravity of the problem. The reason that prompted People’s Finance and Vibor Bikas Bank to rush to the NRB was sudden withdrawal of institutional deposits. And it was NRB that sparked the panic.
Though NRB corrected itself two weeks later, the damage had been done. It had badly shaken the confidence of small depositors, with Gurkha Development Bank and Nepal Share Market and Finance taking a hard knock.
These financial institutions landed in trouble as the promoters used the deposits for themselves instead of genuine loanees.
Pyakuryal says the central bank has to be accommodative at these critical times. And there are signs that NRB has started the much-delayed process. It has expedited measures to tackle the liquidity crunch by relaxing the refinancing facility, issuing “repo” (issuing loans against bank securities) twice a week, and injecting cash (reportedly Rs 5 billion) lying in the government’s pension account into the economy.
The central bank has also said it will be flexible on the non-performing loans (NPL) level and the CD ratio while providing loans under the refinancing facility. NRB has also decided to open another window for refinancing by making a provision that BFIs could get refinancing up to 60 percent of their core capital for four months. Earlier, they could get refinancing of up to 40 percent of their core capital for six months.
Ashoke Rana, president of Nepal Bankers Association, said B and C class financial institutions should be allowed to use the refinancing facility against their good loans. “Unlike commercial banks, these institutions cannot get liquidity from the government as they don’t have enough securities like treasury bills and bonds,” he said. The Finance Ministry says it will unveil a rescue package if needed. “We are monitoring the situation closely and are committed to not allowing it to worsen,” said Keshav Acharya, chief economic advisor at the ministry.
Source: Kantipur
Two financial institutions suffered an acute liquidity shortage this week. The government asked institutional investors not to withdraw their deposits for the time being Nepal Rastra Bank eased refinancing facility.
These were major news stories that appeared in leading dailies in the past few days. The first one shows that the banking system is reeling under a severe cash crunch while the other two are government initiatives to address the situation.
Banks and financial institutions (BFIs) are currently battling the twin problems of liquidity crunch and loan recovery. Never before has the country’s financial sector faced multiple challenges at the same time.
What has led to this situation? And who all are responsible for it? To pick out one factor would be difficult. It is a combination of several factors—mainly, reckless lending to the realty sector, the greed of promoters and their increasing interference in the management of their banks, Nepal Rastra Bank’s (NRB) inconsistent policy measures and indiscriminate licensing of new banks.
Political parties also played their part by squabbling over the government’s annual budget and delaying its release leading to development spending falling to an all-time low this year. The government has been able to spend only Rs 45.48 billion, out of the total allocated capital expenditure of Rs 102.61 billion.
All the BFIs are in a tight liquidity position with slow deposit growth and rising loan defaults. So severe is the liquidity problem that some banks have virtually stopped lending, and its effects are best seen in industries that rely on borrowings. The automobile sector, which needs heavy bank financing, has almost stopped vehicle imports. Auto dealers say their sales have slumped 27 percent compared to this period last year. The same is the case in the housing sector and the capital market. The stock market has hit an all-time low. Shares of some BFIs are now at the par value of Rs 100. The banking sector is more nervous about its failure to recover loans due to a slump in the realty sector. With land prices and the real estate business in a deep downturn, loan defaults are said to have reached an alarming rate. This is substantiated by the latest figures of the Credit Information Bureau (CIB) that keeps records of borrowers blacklisted by BFIs. According to the CIB, 211 firms and individuals have been blacklisted as of June 3, compared to 65 during the same period last year. Many BFIs are restructuring loans in a bid to avoid additional provisioning for defaulted loans and to show that their books are safe.
But that has aggravated the problem. Many bankers privately admit that there is a high probability of some financial institutions going bust and many others getting in serious trouble by the end of the fiscal year (mid-July) when banks issue their annual results. “The real picture will come out by the end of this fiscal year,” the chief executive of a leading bank said. “That is the time when the banks go for the annual audits.”
Admitting that some NRB polices might have had negative impact on the banking sector, NRB board member Bishwambher Pyakuryal said the central bank should now think of wider ramifications while introducing policies.
“Of late, the central bank’s role has been limited to issuing licenses and giving stringent directives to BFIs,” said Pyakuryal. “Timely supervision of BFIs and strengthening human resource took a back seat.” For example, there was no inspection at People’s Finance in the last two years. The company was on the verge of liquidation this week.
To some extent, banks are to blame for the mess. “They neither had plans for liquidity management nor tried to control the trend of excessive lending during the real estate bubble,” said a senior NRB official. Despite the central bank’s directive to control the credit-to-deposit ratio (CD ratio) to 80 percent, many have crossed that limit. This is to allow cushion cash deposit in the banks at all times. Bankers say neither the government nor the NRB is seeing the gravity of the problem. The reason that prompted People’s Finance and Vibor Bikas Bank to rush to the NRB was sudden withdrawal of institutional deposits. And it was NRB that sparked the panic.
Though NRB corrected itself two weeks later, the damage had been done. It had badly shaken the confidence of small depositors, with Gurkha Development Bank and Nepal Share Market and Finance taking a hard knock.
These financial institutions landed in trouble as the promoters used the deposits for themselves instead of genuine loanees.
Pyakuryal says the central bank has to be accommodative at these critical times. And there are signs that NRB has started the much-delayed process. It has expedited measures to tackle the liquidity crunch by relaxing the refinancing facility, issuing “repo” (issuing loans against bank securities) twice a week, and injecting cash (reportedly Rs 5 billion) lying in the government’s pension account into the economy.
The central bank has also said it will be flexible on the non-performing loans (NPL) level and the CD ratio while providing loans under the refinancing facility. NRB has also decided to open another window for refinancing by making a provision that BFIs could get refinancing up to 60 percent of their core capital for four months. Earlier, they could get refinancing of up to 40 percent of their core capital for six months.
Ashoke Rana, president of Nepal Bankers Association, said B and C class financial institutions should be allowed to use the refinancing facility against their good loans. “Unlike commercial banks, these institutions cannot get liquidity from the government as they don’t have enough securities like treasury bills and bonds,” he said. The Finance Ministry says it will unveil a rescue package if needed. “We are monitoring the situation closely and are committed to not allowing it to worsen,” said Keshav Acharya, chief economic advisor at the ministry.
Source: Kantipur
