Is the banking crisis (in Nepal) real?

Is the banking crisis real?
Myrepublica, 27-Dec-09
DR RAGHAB D PANT

With the publication of Current Macroeconomic Situation by the Nepal Rastra Bank recently, based on data of the first three months of the current fiscal year, there have been discussions among the public and in the media arguing that the economy has been hit by three problems at the same speed. They are: (i) the problem in the banking sector due to concentration of its loan – 60.9 percent (or Rs 263 billion, which is equivalent to 30 percent of gross domestic product) of the outstanding loan to be precise – with the security of land and buildings; (ii) decline in the growth of inflow of remittances; and (iii) deficit in the balance of payments totaling Rs 19 billion in the first three months of the current fiscal year. In the first three months of the last fiscal year, the country had experienced a surplus of 8 billion in its balance of payments.

The first problem, however, is not new: It was there and published for public information in the monthly report of the Nepal Rastra Bank. In August, 2009, for example, the total loan with the security of land and buildings was also precisely 60.9 percent of the total and almost the same in September, 2008 (Nepal Rastra Bank, Current Macroeconomic Situation, Monthly Reports, various issues). So, it was a normal affair—though the way we Nepalis used to run the banking system, it was sure to hit the tsunami soon.

Suddenly, in a few newspapers on Dec 17, there was news that the economy is in the midst of serious problems supported by the statement of the Secretary of Finance. According to the Finance Secretary, the decline in the growth rate of remittances and increase in the trade deficit due to rise in import and decline in export were the main reasons of the problem and “ if we did not attempt to reduce import soon, the exchange rate of Nepali currency vis-à-vis Indian currency need to be depreciated.” (Nagarik, Dec 17).

I am perhaps naive, but how can we reduce import when the growth in real income – popularly known as gross domestic product (GDP) at constant prices – is substantially lower than the growth in nominal income? This means that trade deficit will continue to grow as long as there is high receipts from remittances and slow growth in GDP.

In Nepal, the receipts from remittances have been the single most important factor determining the level and direction of economic activities of the country, both at the micro and macro levels. A marginal instability in this source will disturb the foundation of the economy and is expected to be more dangerous than the current political problem.

The foreign exchange reserve of the banking system has been increasing due to rising receipts from remittances and this source has helped the individual family to increase its consumption in excess of the rise in income from domestic source. The import, however, has to go up to meet the increase in national consumption at a rate higher than the growth in real income. This has led to the deterioration in the foreign trade balance of the country but, at the same time, it has been instrumental for the increase in government revenue due to rising receipts from import duties.

As far as the exchange rate is concerned, it is also an old problem. We have been writing since the past several years about the need to depreciate the exchange rate of Nepali currency vis-à-vis Indian currency due to several reasons, including (i) rising deficit in merchandise trade account and , presumably, (ii) capital flight due partly to political disturbances and due partly to difference in the productivity of capital between the two countries (For details, see Exchange Rate Management: The Emerging Problem and the Options, The Himalayan Times, June 2, 2008).

Against this background, I don’t see any new problem emerging; it is the continuation of the same old problem except that the government is not yet ready to change the exchange rate of the Nepali currency. On the contrary, they are trying to find a way to impose some restrictions on the import of goods and services from India to maintain current exchange rate. In fact, the central bank, according to newspaper reports, has already issued several directives to the commercial banks to impose restrictions on financial transaction with India. (The Kathmandu Post, Dec 18) Otherwise, it is not a new problem and the Ministry of Finance is well aware of the situation of the banking system as it has representation in the Board of Directors of the Nepal Rastra Bank too. So the main question is: What were the members of Board of Directors of the Nepal Rastra Bank doing when the country was certain to hit the iceberg?

The problem does not look so serious in the short run but overtime it may get worse. The foreign exchange reserve of the monetary authorities, for example, was sufficient for more than 10 months of import in October, 2008, but declined to reach 8.5 months of import in October, 2009, due partly to the continuous increase in import and due partly to the decline in the foreign exchange reserve in the current fiscal year. The most important factor, however, was the maintenance of unrealistic exchange rate. Again, the government is determined to maintain the same exchange rate that was in use, to the best of my knowledge, in the Panchayat period.

For the general public, myself included, the critical issue is the loan against the security of land and buildings which, as indicated earlier, is 60 percent of the total since the past several years. Now, for the commercial banks, the central bank has capped the investment limit for the realty sector at 40 percent of the total loan portfolio by 2012/13 informing the public at the same time that only two banks out of 27 banks have crossed the 40 percent exposure limit (Republica, Dec 19). It looks somewhat strange. Firstly, if only two banks have crossed the exposure limit, why such a big issue? Secondly, how did Nepal Rastra Bank calculate the loan to the so-called realty sector as the information made available to the general public shows the concentration of loan of the banking system against the security of land and buildings to 60 percent of the total. (Monthly Economic Report of the Nepal Rastra Bank, various issues) It appears that the officials of the Ministry of Finance and the central bank have unnecessarily magnified the problem, and still no new measures, except those designed to maintain the current exchange rate, have been undertaken.

The financial problems, by nature, can deteriorate at a rapid rate as the current experiences of the developed countries and that of East Asian countries in the nineties suggest. In Nepal’s case, when the situation gets worse, the concerned ministers may use the occasion for world tours in the name of looking for foreign employment for our young boys. International migration, however, cannot solve domestic problems, and a paper by the staff of the International Monetary Fund as early as 2006 shows that remittances cannot be , and never have been, used as substitute for capital flows or foreign investment. Now is the time to change the direction of the economy with priority on domestic employment and production rather than on foreign employment and remittances. The central bank should start lending a hand to job creation.

The political parties have not yet felt the need to take initiative in the area of economic management. Let us hope that they will change the direction soon. If the politicians refuse to learn from the history of the present crisis, to reuse the term once made popular by Paul Krugman, they will condemn all of us to repeat it

NRB tightens monetary policy

NRB tightens monetary policy
Hopes to prevent high risk investment in real estate
ekantipur, 25-Nov-08
Prithvi Man Shrestha

Nepal Rastra Bank (NRB), the country's central bank, is tightening the country's monetary policy to discourage financial institutions from further investing in real estate without considering the risks.

The International Monetary Fund (IMF) had said Sunday that the loose monetary policy adopted by NRB had, to some extent, contributed to boost real estate prices.

IMF had also warned that decline in real estate prices would have a negative impact on banks and their output growth.

Talking to the Post, NRB Acting Governor Krishna Bahadur Manandhar said the central bank had increased 'risk weight' provisioning to 150 percent in the real estate sector against 100 percent in other portfolios.

He informed that NRB had also increased cash reserve ratio (CRR), the minimum reserves a bank must hold to deposits, to 5.5 percent from five percent to discourage banks and financial institutions from investing in high risk ventures.

NRB said 13 percent of Nepali banks' investment was in the real estate sector, which could not be termed 'massive'.

However, Manandhar said that some banks had invested up to 40 percent in the retail sector. “Especially new banks as well as some old ones have high investment in the retail sector,” he said.

President of Nepal Banker's Association Radhesh Pant was of the view that banks should be more cautious in investing in real estate and NRB should monitor the banks closely.

Banks should make correct valuation of the collateral given that real estate had been witnessing a bubble for the last few years, Pant said.

Pant, who also heads Bank of Kathmandu, stressed the need to diversify investment among various portfolios to minimise risk.

It should be noted that the current global financial crisis started from the real estate sector after financial institutions investing heavily in sub-prime and other high risk mortgages were hit by high rate of defaults after housing prices in the U.S. dropped significantly.

Another concern of IMF was the growing number of financial institutions licensed by NRB, which, it said, was putting NRB's supervisory soundness under strain.

Manandhar said NRB could not prevent any bank from coming into the market if it fulfilled the set criteria.

He said that NRB had increased capital adequacy to Rs. 2 billion for commercial banks just to start their operation from the earlier requirement of Rs. 1 billion in order to discourage the launch of new banks.

“We have also provisioned for disclosure of income sources of new investors in banks,” he said. “And yet, we have failed to stop new banks from coming into the market.”

Three new national level commercial banks and 32 other financial institutions are currently awaiting the central bank's approval, according to NRB. There are 25 national level commercial banks already in operation.

Manadhar was also confident that inflation would decline to a single digit although IMF had predicted it would hover at around 11 percent.

“Inflation has already reached its highest level. It cannot grow at the same level this year,” he said.

“Given the global economic slowdown and the nosedive in petroleum prices, inflation is certain to go down,” he added.

New monetary policy to focus on inflation

New monetary policy to focus on inflation
ekantipur, 9-Jul-08

With a major focus on curtailing the swelling inflation that is already close to 10 percent, Nepal Rastra Bank is all set to bring out its Monetary Policy for the next fiscal year, even though the government is deferring on the announcement of a new fiscal budget.

A high ranking government official told the Post that the central bank is making all the necessary preparations to announce its annual monetary policy in the third week of July. "As per the NRB Act, we will make the monetary policy public on the usual time despite the fact that the government is delaying the announcement of a new budget," said the official.

He further said that as the central bank can amend its monetary policy anytime, it will do so if the policies or provisions of the upcoming budget contradict with NRB's monetary policy.

He said that the major focus of the new monetary policy would be to deal with the rising price level, though the central bank has limited policy options. Since rising inflation is a global phenomenon, domestic policy can hardly make any remarkable impact to keep the inflation level within a desired level.

However, he dropped hints that there will be no change in the existing bank rate and Cash Reserve Ratio (CRR) to squeeze liquidity to control inflation, as there is neither a liquidity crunch nor excess liquidity to fuel the inflation. "Curtailing money supply in the name of limiting inflation will hurt growth prospects and that is something we don't want," he said.

He further said that the upcoming monetary policy would take measures to increase interest rates on deposits to provide some relief to the depositors, who are facing a negative interest rate.

"Higher interest rates on deposits will also help curtail consumption," he said and added that there will not be any remarkable impact on investment even if the lending rates go up by one to two percentage points.

The official said that the monetary policy is less likely to announce any major policy changes for promoting exports and added that there are hardly any measures that can be announced to promote the sector. The monetary policy, among others, will also announce the full-fledge implementation of the Basel II, an advance account keeping tool for financial institutions aimed at raising the quality of financial transactions up to international levels and promote more transparency.

53RD NRB ANNIVERSARY : Role of central bank increasing

53RD NRB ANNIVERSARY : Role of central bank increasing
ArthaExpress, 26-Apr-08

Nepal Rastra Bank (NRB) today celebrated its 53nd anniversary. On the occasion, employees of the central bank voiced serious concerns over the long-absence of the regulatory authority’s head. “How can the regulatory authority function without its head for so long,” the speakers questioned, adding that the morale of staff is down.

“Financial sector reform programme and action against the bank defaulters have also been hit hard due to the delay in governor’s case,” they opined. They even challenged the government to action against the wilful defaulters.

In the last fiscal year only, three new commercial banks came into operations making it a total of 23 commercial banks. Similarly, 21 new development banks came into existence making it to a total of 58 development banks and nine finance companies came into operations making it to a total of 79 finance companies.

“Now the supervisory and regulatory role of the central bank has increased,” said acting governor Krishna Bahadur Manandhar. “With the increasing financial institutions, NRB’s supervisory capacity also has to be increased.”

The country has entered into a new era and for a strong economic growth, role of the central bank cannot be ruled out. “Economic inclusion is not possible without higher economic growth,” he added.

“However, political stability and lasting peace are prerequisite for higher economic growth,” he said, adding that rising price and plummeting exports are major concerns for the economy at present.

“Ever increasing global fuel price has also hurt our budget,” he said, adding that economic stability has become a strong challenge in such a situation.

Himalaya Shumshere JBR, the founding governor of the central bank, on the occasion, said that Nepalis have done nothing for economic revolution and social transformation in last 50 years.

“After political revolution one chapter of histroy ended and its high time now to work for economic revolution,” he added.

Forex reserve on upward trajectory

Forex reserve on upward trajectory
eKantipur.com, 9-Apr-08

The foreign currency reserve rose by nearly 10 percent in the first two quarters of the current fiscal year propelled by a steady flow of remittance.

The latest data of Nepal Rastra Bank (NRB) shows that Nepal's hard currency stash totaled Rs 182.38 billion in mid-March, up from Rs 166 billion in mid-July.

Economists said the increment in the foreign exchange reserve was a stimulating factor for the economy. The jingling cash box puts the country in a comfortable position to meet debt servicing obligations and pay its import bills, they said.

The experts added that when the foreign exchange reserve goes up, foreign investors feel more secure that they will be able to repatriate their profits without problems.

Nepal has amassed Rs 171.8 billion in convertible currencies (all currencies except the Indian rupee) and Rs 10.5 billion in Indian rupees.

Of the total foreign currency reserve, the central bank holds Rs 145.12 billion while the commercial banks have Rs 34.33 billion.

The central bank has purchased Indian currency equivalent to Rs 58 billion to meet the expanding demand for rupees.

An NRB official said the enlargement of the foreign exchange reserve would keep the economy stable even during difficult times.

The money in the bank will allow the country to liberalize the economy by relaxing its monetary and fiscal policies and promote growth and create employment, he added.

The official said that the increase in forex holdings justifies maintaining the pegging regime with India as the flow of foreign currency there has been rising steadily.

“When we were running short of Indian currency, we were able to obtain it by trading US dollars as we were in comfortable position in terms of our greenback reserve,” he said.

He added that if a conducive atmosphere for development emerged, the government could also use the reserve to develop infrastructure.

BoP deficit may lead to crisis in forex reserves

BoP deficit may lead to crisis in forex reserves
eKantipur.com, 4-Jan-08

The continuing deficit in the country's balance of payments (BoP) may lead to a crisis in foreign exchange reserves, say monetary economists.

“The declining trend should provide a wake-up call to policy makers to devise ways to deal with it,” said Dr Raghav Dhoj Pant, a monetary economist. “It is a very worrisome situation, and if not dealt with immediately, it could go out of control.”

The data compiled by the Nepal Rastra Bank (NRB) shows that the BoP registered a deficit of Rs 3.61 billion in the first four months of the current fiscal year. During this period, the foreign currency reserve slipped down 1.2 percent to Rs 163.12 billion. There was a surplus of Rs 180.8 million in the BoP during the same period last year.

The country held enough foreign exchange to finance imports for 8.1 months during the period under review ended mid-November. However, during the same period in the previous year, the foreign exchange reserve was adequate to pay for imports for 8.7 months.

Pant said past experience in Nepal shows that once the reserve goes into a decline, the downward spiral begins to accelerate. “We cannot rule out this scenario now, as capital flight is on the rise,” he said. An official at the NRB said exports were falling and widening the trade deficit, thereby causing a big hole in the BoP. Exports decreased by 6.3 percent in the past the four months.

“The major reason behind the shortfall is that new investments are not coming in,” said the official. He said the government must chalk out a strategy to lure investment, both domestic and foreign, to boost exports. “Otherwise, stemming the deficit may not be achievable,” he said.

Pant also suggested that the government review its pegging system with the Indian rupee. “Our fixed exchange rate is not sustainable and justifiable as the Indian economic growth rate is way above Nepal's,” he added.

But, the NRB official said the pegging system has more benefits for Nepal. “As we do not have a strong export base, it is not the right time to depreciate our currency,” he said.

“As long as we have enough dollars to buy Indian currency, it does not have any impact on the economy.”

In recent periods, the central bank has faced a serious crunch of Indian currency. It bought Indian currency equivalent to Rs 26.87 billion, selling US$ 420 million.

New monetary policy focuses on deprived class

New monetary policy focuses on deprived class
eKantipur.com, 23-Jul-2007

Apart from a renewed attention on channeling urban-based resources to rural-based deprived class, the monetary policy for the fiscal year 2007/08 that Nepal Rastra Bank (NRB) made public on Sunday, announced no remarkable policy changes.

The monetary policy focusing mainly on managing high liquidity and maintaining fiscal stability, vowed to limit the inflation rate at 5.5 percent and achieve surplus balance of payment of at least eight billion rupees during the running fiscal year.

In order to bolster institutional investments to the disadvantageous sectors, the policy has raised single borrower limit for microfinance institutions to Rs 60,000 for individuals and Rs 150,000 for micro enterprises. Microfinance institutions that raise their paid-up capital by Rs 2.5 million, will be allowed to extend services to one adjoined district, the policy stated.

Similarly, now onwards commercial banks are required to extend 3 percent of their total loan investments for deprived sector. The policy has been extended to development banks and finance companies as well. "There will be no need of 20 percent additional loan loss provision on the loans extended to the deprived sector," according to the policy.

With an aim to boost investment in major infrastructure projects, the policy has raised the existing single borrowing limit to 25 percent of the primary capital while extending loans to sectors that require huge investments like hydropower.

The new policy has announced to slash export refinance on Nepali currency by one percentage point to 2.5 percent but a cap on lending interest rate of five percent has been set for commercial banks extending such loans.

The central bank has also announced to extend concessionary refinance at 2.5 percent to support the revival of cottage and small scale industries, but the retail interest rate of such loans should be less than 5.5 percent.

The central bank continued the policy of extending loans to sick industries at a concessionary rate of 1.5 percent. However, the policy has made it clear that commercial banks dealing with such loans are not allowed to charge an interest rate if more than 4.5 percent.

Likewise, in order to check possible misuse of short-term loans being provided to development banks and finance companies by commercial banks, the NRB has raised penal interest on such loans.

The monetary policy has also lowered the service charge that the commercial banks have to pay to the central bank while exchanging foreign currency to one percent from two percent.

"The rate of commission that banks charge to the customer while buying convertible currencies will come down by the same level," stated the policy.

Similarly, the policy has also vowed to continue strong actions against willful defaulters and said, "Necessary procedures would be initiated in coordination with the government to take action as per the existing rules against the big borrowers who have defaulted by more than Rs 10 million."

The policy estimates that the board money supply will remain at 15.6 percent against the estimated 15 percent recorded last year. Internal loan is expected to grow by 17.1 percent and the total loan investment from banking sector to private sector is likely to increase by 18.5 percent during the current fiscal year.

Nepal's forex reserve hits Rs 171 billion

Nepal's forex reserve hits Rs 171 billion
eKantipur.com, 8-Jun-2007

Propelled by continued healthy growth in remittance income, the country’s foreign currency reserve has scaled up to Rs 171.56 billion, an 11 percent increment than last year's total reserve.

The total remittance income stood at Rs 72.39 billion during the first nine months of the current fiscal year and the amount was 3 percent more than what was recorded during the same period last year. The remittance income last year was over Rs 95 billion during the fiscal year 2005/06.

According to Nepal Rastra Bank (NRB), the amount however is less than Rs 177.94 billion recorded a month ago mainly due to the a 4.44 percent appreciation of Nepalese currency against the US dollar within a month. The official exchange rate of one US dollar against the Nepali rupee was Rs 68.40 in mid-April and the rate slipped to touch Rs 65.46 within a month. According to NRB official, the accumulative appreciation of the domestic currency against the greenback has scaled up to 13.26 percent within the current fiscal year, starting in mid-July.

Among the total foreign currency reserve, the convertible currency that mainly comprises US dollar, accounted for Rs 165.64 billion, which was nearly 96.5 percent while remaining Rs 5.9 billion has been stored in the form of Indian currency.

In order to address the deepening short supply of Indian currency, the central bank has purchased Indian currency worth Rs 30.15 billon during the first ten months of the current fiscal year whereas it had purchased Rs 26.84 billion last fiscal year.

Likewise, central bank held almost 79 percent of the total foreign currency reserve, amounting Rs 134.83 billion while the commercial banks were holding the remaining Rs 36.72 billion till mid-May 2007.

Among the commercial banks, Standard Chartered Bank has the highest amount of foreign currency, amounting US$ 125 million followed by Himalayan Bank (US$ 107 million) and Nabil Bank (US$ 89 million).

Inflation on high trajectory

Inflation on high trajectory
eKantipur.com, 10-April-2007

Inflation continued to stay on a high trajectory, driven up by stiff price rises of food items during the seven months of the current fiscal year. It touched eight percent in mid-February, compared to 5.8 percent of a year ago, shows a report of Nepal Rastra Bank (NRB).

The central bank stated that supplies of spices and pulses fell far short of the demand in the international market, thereby affecting their domestic prices.

“Furthermore, the recent terai protest that affected the supply of daily consumables like vegetables and fruits also pushed up prices,” the report stated.

However, the money supply -- a factor that normally determines the level of inflation -- seemed not to have played any role in propelling up prices.

The broad money (M2) supply registered a moderate growth of 9.5 percent, while narrow money (M1) increased by just 7.1 percent.

Despite the materialization of peace, government expenditure remained very low, indicating that development activities are going on a slower pace.

The report demonstrates that the government expenditure increased by 13 percent to Rs 51.6 billion in the first seven months this current fiscal year, while it grew by 19.6 percent in the same period last year.

On the revenue front, the actual revenue collection exceeded its target, growing by 17.9 percent to touch Rs 42.25 billion.

On the trade scenario, things remained bleak with export declining and import decelerating. The total exports fell by 3.9 percent during the period compared to an increase of 12.2 percent in the corresponding period last year, due partly to load shedding and terai unrest.

Of total exports, the country registered a faljavascript:void(0)
Publishl of 5.4 percent in the export to India as against a sharp increase of 22.8 percent in the same period last year. Likewise, export to third countries decreased by 0.4 percent.

Imports grew marginally by 0.3 percent in comparison to the rise of 25.1 percent in the same period last year, as industries demanded fewer raw materials due to the declining exports.

On the foreign exchange front, the reserves rose by only 3.4 percent to reach Rs 170.7 billion in mid-February.

Stung by decelerating remittance growth and decreasing export, the balance of payment remained at a surplus of just Rs 6.3 billion, down from the surplus of Rs 13 billion during the same period last year.