nepalese banking crisis explained

8/6/2019 Nepalese Banking Crisis Explained

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the nepl Chrered accou | Mrch 201116

NePALeSe BANkING cRISIS exPLAINeD

chANDAN SAPkoTA*

ne h bee ggig mii

mcecmic bce ce

ye w. lw gwh e, high

emyme, bce yme

decit, ballooning trade decit, andhigh and sticky ination are some of

he eig exiig mcecmic

chege. nw, h i

bkig iqiiy cie—

egeee gey by he bk

nancial institutions (BFIs) themselves

me exe by ne r

Bk (nrB), he ce bk— i

i ceqece i bey

he bkig yem.

the nrB ige he hehycmeii, qeibe eig

ew ec, gvece i

nancial sector. In doing so it let new

BfI wih eve evig i

he ecmy ee my hem,

k mge c mee

e. Mewhie, he BfI egge

i hehy ime eig

eei vive mi

ch cmeii, which i geig

y by he y. the BfI’ ibiiy

eecivey ce wih he ee icee ei eig,

attain unsustainable prot targets is

leading to a situation where all prots

e ive b e e ci, i.e.

xye y he c ecke

bie cice he BfI i he

m exeive ece ckge.

Wih ee c chge i he bkig

iy, ne wi ee my ‘nhe rck mme’

evey i ‘lehm mme’ we.

the eecy eek h em, qick e gi

g em vibiiy ibiiy i eig he BfIi h e-eci. f hehy bkig

iy, ne ee ewe b ge BfI wih

ce gvece. fheme, hee h

be ehceme egy eviy

capabilities of NRB. The playing eld has gotten

eceiy cgee mi e h ie

gwh e i he mbe ei vi-à-vi BfI.

NoRTheRN Rock AND LehmAN momeNTSWhe Vib Bik Bk (VBB) kcke he

ne r Bk (nrB) Je 9, 2011 eiheijec mey i he eveme bk ke ve

mgeme, i e he bkig iy he

ey ici ei. thee wee m

icii h e exceive exe

e ee, hig cci ec bk

nancial institutions (BFIs) will land in the red sooner or

e (shm, 2011).

the e mve by Vib me ei ic

policymakers scurry to nd a way to avert a ‘Lehman

mme’—he y whe us iveme bk lehm

Bhe ce (seembe 15, 2008) iggeethe global nancial crisis that was ensued by the global

ecmic cii. I ne’ bkig hiy, he ece

Vib i ‘nhe rck mme’—he y whe he

Bank of England extended emergency nancial support

he be mgge ee seembe 17, 2007

ve i m cig.

* mr. spko i reercher souh ai Wch on trde, Econoic nd Environen (saWtEE), Khndu

BANkING Jour nal of Inst itut e of Charter ed Accountants of Nepal, Vol.13, No.4




BRIeF hISToRy oF BFIS GRoWThthe iiii m bkig yem i ne

cmmece wih he ebihme i 1937 ne

Bank Limited (NBL), the rst Nepalese commercial

bk. the cy’ ce bk, ne r Bk(nrB) w ebihe i 1956 by ac 1955,

e ey w ece nBl’ exiece. a ece

e he ebihme nrB, riy Bijy Bk

(rBB), cmmeci bk e he wehi

he Gveme ne w ebihe. ae he

nancial liberalization in the 80s, a third commercial

bank in Nepal, or the rst foreign joint venture bank,

w e ne ab Bk l (w naBIl Bk

l) i 1984. fwig hi, w eig ji vee

bk, ne Iez Bk l (w ne Iveme

Bk) ne Giy Bk l (w s

Chee Bk ne l) wee ebihe i 1986 1987 eecivey.

I 1983 1993 hee wee w eigh cmmeci

bk eecivey. By Jy 2006, hee wee 17,

icig ji vee. thee wee 4 eveme

bk i 1993, which wee 29 i 2006. fice

cmie cme i exiece i 1992 by Jy

2006, hey mbee 63.

fige 1: nmbe BfI i ne, 1980-2010

Source: Author’s compilation using Bank and Financial

Statistics 2010 and Economic Survey 2010/11

Cey, hee e ve 308 BfI, icig 31

commercial banks, 87 development banks, 80 nance

companies, and 21 micronance institutions.

the gwh i mbe BfI i eceee

we by he ecmic bkig me

he ece.

STATUS oF BFISa mi-Jy 2010, e ei

i bkig ec me r 996.1 bii r

795.3 bii eecivey. the me

r 622.6 bii. the mke he ei

cmmeci bk h ecie m 85.6% i mi-

Jy 2008 79.4% i mi-Jy 2010, whe he he

of development banks, nance companies, and other

BfI w 9.7%, 10% 0.9% eecivey (Miiy

fice, 2011). I he hee ye, hee h bee

igh ecee i ei i cmmeci bk b

increase in development banks and nance companies

(ee fige 2).

Mewhie, he , cmmeci bk’mke he h ecie m 78.6% i mi-Jy 2008

74.2% i mi-Jy 2010. dig he me ei,

the share of total loans of development banks, nance

cmie he BfI w 10.6%, 12.8% 2.4%

eecivey.

a ai 2011, nrB hw h he ei

cmmeci bk r 642 bii. o

he cmmeci bk’ ei, em ei,

savings deposits, and xed deposits stand at 12%, 36%,

52% eecivey. they hve iqi r 114

bii (ch i h r 16.2 bii, ei wihnrB r 39.3 bii). Me h r 110 bii i ivee

i e ee by he cmmeci bk e. ove 72%

of commercial banks’ credit ows against xed assets.

fige 2: Mke he ei eig (%),

mi-Jy 2010

BANkING




Source: Economic Survey 2010/11

a he g meic c (Gdp),

ei, cei (icig cim gveme)

ive ec cei e 51%, 54.9% 43.6%,

eecivey (ne r Bk, 2011). pe e

ei mi-ai 2011 w r 20,100 e

e w r 19,000 (Miiy fice, 2011).

Cmmeci bk’ ei iee e ge m

2-12% 7-18%. Iebk eig e ge

bewee 10 14%. righ w, he iee e,

which i he ieece bewee eig ei

e, i high. the wie i i, he me wime

he e BfI. likewie, he high ie-bk ehw h he bk hemeve e ec e

mey ech he. sme he BfI e ye mee

he evie ci eqcy i, which i he i

bk’ ci i ik, i by he nrB, keeig

i mi hei iceig vebiiy exceive

exe j ew ec (ne r Bk,

2010b).

BANkING TRoUBLeS SImPLIFIeDWih i icee i ei be

and diversication of investment portfolios, the gwh i he mbe BfI e ch

cmeii i eicig ei (iii,

gveme iivi) bwe. Bye by

iig emice, he me wee iceivize

ei ch high iee e he h kig

eive ce iveme, which i ckig igh

w e iic ibiiy vi -ecmic

ci.

Mewhie, he BfI cie ey e ee

hig ec bwe wih eig hei

cciy h iee ici yme i

ime. I e i ie i em e ee

hig cci i b e eci

i ice. Whe he bmy high ice e

, he bwe wee be y bck iee

ici i ime, eig h iqiiy i he

bkig iy.

simey, cegy B, C d1 BFIs were nding it

h bw me m cegy a BfI bece he

ie-bk eig e w m bve he vege

BfI’ m eig e. We, me BfI hve

ee egive i e mey BfI which

hey hik e he vege ce. the iqiiy

cch w, mi exe, cme byhe gveme’ ibiiy mbiize eveme

exeie, he big iii ei’ ecii

to pull out mature deposits from edging BFIs, and a

ww i ei gwh e.

the cmbie eec hee c hi h bk

ch Vib h h bi exe ew

ec, cmeig hem eek nrB’ ievei. I

effect, there is a serious erosion of condence on the

bkig yem, ge i em cmmiie

ike g ive.

TWo BUBBLeSBy vekig he ee hvig imie mbe

of BFIs, the evolving depositor base, and nancial

eei ve he ye, he nrB e my BfI

. I cee BfI bbbe. thi w we

by iee cmeii y bewee bk i

he me cegy b bewee BfI i iee

cegie, eig im w i eig high

ei e eig wih ieeiig mke,

products, and borrowers’ creditworthiness. It reected

b ce gvece, ck ivi

r&d i he ec. the eig eig ge i eee hig mke y wee hei

ice, eig e ee hig bbbe.

cAUSeS oF LIQUIDITy AND BANkING cRISeSthee hve bee mieig icg gme

oating around about the causes of the ongoing liquidity

bkig cii. they e me by kehe wh

1 Category A, B, C and D means commercial bank, development bank, nance companies, and micro-nance development banks.

BANkING




i ee hw hei vee iee icmeece

i jeizig he e he bkig iy, i

eiy eiig ey be ecmy.

fi, bke bieme e gig h eye

bge ibeme eveme exeie

e cig iqiiy cii. thi gme e h

mch we. I i e h bge hve bee cmig

e w ye w, hee h bee m

ow of money from the Ministry of Finance and other

Miiie he eecive ce he cy vi

BFIs. This has denitely limited liquidity in the banking

yem. B i i ie i he mi ce. Ie,

i i mi im he iqiiy cii. I ey i

eveme exeie i he ce, he why i

ne hve iqiiy cii whe imi eie

occurred in the past?

sec, he wihw ge m mey by

iii ei, eeciy nrB ne amy,

h icy ece eeve i BfI’, eeciy

cegy B C, v qeeze vibe iqiiy.

thi gi i im he iqiiy bem, i

mi ce. I j by ig ew mii me

ei by iii ei he BfI i

be, he hee i mehig wg wih he wy hey

e ig bie. I i bke’ icmeece

ibiiy BfI.

thi, whie me ge h ee e eihe hig

mey hme e iveig i cmmiie ike g

ive, he e h he cmi ivge

ce icme ci bve r 1 mii i

eicig ei. agi, bh e he e ce,

b im he iqiiy cii. thee gme

e mee by cei bieme wh e i

ivgig hei ce icme iy y xe

he gveme.

fh, me ge h ecie i eeve, eciey

mey be (which i eq cecy i cici eeve bk he i ce bk), e

ww i gwh emice, e ii

whee cei gwh w highe h ei gwh.

they e h i i eig i iqiiy cii,

e m, he nrB h che b

ey bi we ch eeve i he

ey high ci eqieme ( which wi he

icee iqiiy). o he gme, hi h me

h. B iceig iqiiy wih cecig he

ie mke w y e he ievibe.

the mi ce i h ne h my BfI ceig

to too few customers (note that a 2006 study on nancia

eei hw h y 26 ece heh

i ne hve bk cc (fei, Ji, & rj,

2006)), meig h i e vive mee

ever-increasing prot targets, the BFIs have to have

constant ow of money from all sources, that also in

higher proportion than previous ows. The competition

to attract deposits and give out loans intensied with

he icee i he mbe BfI, wh cmee

wih mch c mke ieeii.

Wih cieig ei hei biiy

fulll demand for withdrawls, the BFIs lent unsustainabl

amount of loans to earn quick returns to meet protge bee he gee meeig hehe

iec. thi e i e ee

hig ec bbbe, which cke i mch r

110 bii cmmeci bk’ ei.

Buoyed by easy nance and loans, real estate

ci hig cmexe e iy.

Sometimes articial demand was created just to jack

ice. thi i evie m he c h hky

ecmic me jiy mi icee

i ice i me y. Meve, mey i

me i hi ec wih ey eig ik he biiy bwe ey . the BfI e

hy iigihig bewee m bm

. thee i ie c mke ieeii

thi w ge by nrB’ ey mey icy,

lax supervision (by near-retiring ofcials who had

execi mvig i ive ec bkig)

inow of remittances, which is approximately one-fourt

Gdp igh w.

thi cee mke ieqiibim, i.e. he y

e ee hig cmexe ie em,

eig ecie i ice by mch 30 ece. aice ie, bwe e wi be be h

ici iee yme ime, cig he BfI

ece viby icee eig e.

thi i e i eig bye cceig

bkig eve e yig he miimm eqie

w yme. s he mj b cee wi ee

‘gh’ me, i.e. emy me wiig

cme eihe by e hem. thi wi ime

BANkING




hi he BfI eve he e i ge me

ecig cii.

WeRe We WARNeD?Many nancial and economic analysts failed to perceive

he i chge heig i he bkig ec.

simiy, bie ji ey ie eve e

ce be ig me h ece g whe

he w iqie ne deveme Bk (ndB) w

e mgeme eview, whe he mbe

BFIs increased multifold in a matter of just ve years.2

I migh be iig bece mjiy bie

ji i ne cy hve iig i

ecmic bie. they ke -he-jb iig

bie eig e behi he cve i

hmig he ecmic me be.

th beig i, me beve, ji, y,

bke i eceive he mig cie. the

wig be g whe he ie wi ee

exceive -emig BfI e

i 2006.

movING FoRWARDthe nrB c y ch c--me

gme ech ime he BfI ieiby icee cei

wih eig he ceiwhie bwe

hei ei gwh.

The repeated introduction of renancing facilities will

eve he ece bem. I wi y ee he

ievibe ecig he eie bkig ec.

Mewhie, e wy he he, he c ch

renancing facilities will have to be paid by taxpayers.

I i m biig be BfI wh g

i he me e hei w icmeece, e

he bic’ eie wihw ei ive

i cmmiie ike g ive, be. thee

i bem m hz i he BfI, i.e. hey e

recklessly lending to earn quick prots and by knowing

h i hey g bey , he gveme wi bi hem

.

f he h em, he nrB h e i

icee iqiiy h xi ei e

cme w. thi h be we by ccee

e cie bkig yem. the nei

bkig iy h g bck igy, which i

chceize by ew bk b my ei

bwe mke ce, i hig e ge m.

International nancial experience shows that few and

g BfI wih igh evii e e cii

prone nancial system (Allen, 2011). Few but strong

BfI wih igh evii w e eci i

eig exee, hehy cmeii, ecmic

ce ivi i he bkig iy.

f g em i, ne h hve mehig

ike “Troubled BFI Relief Program”. I c be

we by wihi nrB whe mi e w

be ece ece be BfI h he

bem i yemic, ei e ice BfI. I c be give he hiy e

e, chge mgeme, ce mege cqiii,

h he mjiy he be BfI i

hey e hehy e. I w cie

he bkig ec, eiy e ewe b

hehie BfI h e ivive i viig evice

he bic, ke exceive ik ei he

eie ecmy.

I be BfI eek he m he nrB he

gveme, he hey h be iece e he

ciiie vie hgh hi gm. Whe hey ,hey h be ce eg c chge.

the gm c hve hiy e e, chge

mgeme, ce mege cqiii, h

mjiy he i i e hehy e,

mg he mee e he BfI kck i

ice.

a gm ike hi e i eee bece he nrB c

simply extend loans and renancing facilities at the

exee xye’ mey by iceig mey

y ech ime BfI ge i be. Mewhie, he

BFIs also cannot inict damage to third party due to their

w hcmig. thi c be eme i

he ecig bem. I h g he BfI

bkig yem e cee. le i c be

give me eeh ch eviy viy e i

ne-tuning of banking sector.

2 see sk, 2009; sk, 2009b; sk, 2011; sk, 2007 he ici he eveme i he bkig iy.

BANkING

nepalese banking crisis explained

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