Real estate loan at risk

Finance Ministry suspected that the real estate companies have not been depositing the money they have been collecting from booking their products making the real estate loans more vulnerable.
"Some 15 per cent of the total booking amount has yet not come to the banking channel," said finance secretary Krishnahari Baskota. However, the real estate developers have claimed that they have been honestly depositing the booking amounts. "We have also been serving the interests, though it’s difficult for us due to slowdown in the business," said one real estate developer without wanting to be quoted.
But the ministry has calculated that the 15 per cent of the total booking amount has still been out of the banking channel and is under heavy risk. The banks and financial institutions have lent around Rs 100 billion to the real estate, according to the central bank data. The slowdown in the real estate has hit the banks and financial institutions as they have to provision more for the loans that are gone worse.
On one hand the banks and financial institutions have been under pressure to maintain Credit to Deposit (CD) ratio — according to the central bank's directives — and on the other, their loan to the real estate sector has been under risk due to slowdown in the real estate business adding pulling their growth rate down. The profit growth rate has come down to almost half in the third quarter compared to the same quarter of the last fiscal year.
Some of the banks and financial institutions have managed to sail through the crisis but others have been feeling the heat which has been reflected in their third quarter report. The overall all profit growth rate has gone down with increased loan loss provisioning and non-performing assets. The average non performing assets of the banks that stood at 3.5 per cent by the end of the second quarter have gone up to almost four per cent due to single sector concentration in the real estate, according to the banks.
The banks, however, claimed that their loans to the real estate sector has not gone bad but has been delayed due to slowdown in the business.
Similarly, the real estate developers have been asking the government to pump Rs 25 billion into the sector to make it moving, which could help the sector resurrect.

Central bank bans account maintenance charge

The central bank has asked the banks and financial institutions not to charge any fees from clients for operating accounts.
Similarly, they have to set up a separate 'Sick Industry Desk' — for the maintenance and monitoring of the sick industries — under their Loan Department, the central bank said today.
However, the central bank has allowed the banks and financial institutions to calculate the long term loan of five years or more in foreign currency that it had received as its core capital or local currency loan.
The banks and financial institutions were earlier asked to bring down credit-cum-core capital to deposit (CCD) ratio to 80 per cent to maintain liquidity. "However the foreign currency loans can be calculated as core capital now," according to the central bank," it added.
Almost all the commercial banks have already met the credit-cum-core capital to deposit (CCD) ratio of 80 per cent.Similarly, the licensed banks and financial institutions can take local currency (LCY) loans and grant from the foreign agency or its branch in Nepal with prior approval from the central bank. But the loan or grant should not increase the banks and financial institutions' liability, said the central bank that had earlier allowed them to take loan or grant in foreign currency only.
A finance company and its branches in 30 districts — that have no access to finance, according to the central bank — can do foreign currency (FCY) transaction — purchase foreign currency and sell it to the central bank or the commercial banks — after getting licence for the foreign currency transactions from the central bank, the new directives said, adding that a bank or financial institution can buy loan of the other institution at not less than the double of the total due loan and its interest in case the interbank loan, according to the amended directive.

Monetary Policy reduces CRR by 50 basis points

The central bank brought a cautious Monetary Policy for the fiscal year 2011-12 that however could be a little embarrassing for the fiscal policy.
The Monetary Policy has reduced the Cash Reserve Ratio (CRR) by 50 basis points or 0.5 percentage point to five per cent. “To ease the liquidity situation, the policy has reduced CRR by 0.5 percentage point to five per cent," said central bank governor Dr Yubraj Khatiwada. The revised CRR is estimated to instantly release around Rs 4 billion in the financial system.
However, the banks have to reduce their Credit to Deposit (CD) ratio by the mid-January – that is in six months to – 80 per cent from current 85 per cent, which will curb the lending capacity of the banks.
The Monetary Policy has targeted seven per cent inflation and five per cent growth rate following the budget for the current fiscal year 2011-12.“To support the budget’s growth rate of five per cent, the central bank is planning 12.5 per cent broad money supply," Khatiwada said without elaborating its implications on price hike. In the last fiscal year too, the Monetary Policy had aimed seven per cent inflation and planned 15 per cent money supply.
However, the money supply remained 3.5 per cent – of commercial banks – and 7.3 per cent including commercial banks, development banks and finance companies. But the inflation remained over 10 per cent in an average.
The central bank governor accepted that the overall macroeconomic policy needs revision as the Monetary Policy could not achieve inflation and Balance of Payment (BoP) target. The BoP that was Rs 11.67 billion deficit in the first 10 months of the fiscal year, has however, recorded a ‘miraculous’ surplus of around Rs 1 billion by the end of 2010-11, he said, attributing 'surprise surplus' to foreign grants and aids released in the last month.
For the current fiscal year, the Monetary Policy has targetted Rs 5 billion BoP surplus.
The Monetary Policy did not change bank rate – the most awaited by the banks and financial institutions – refinancing rate and Statutory Liquidity Ratio (SLR), but promised to revise refinancing according to liquidity need.
The Monetary Policy has however increased foreign exchange facilities as a citizen can get exchange facility of $2,500 for once or $5000 in a fiscal year at maximum revising the facility from last fiscal year's $2000 and $4000.
Similarly, NRNs can open bank account in foreign currency and special arrangement will be made for Nepalis also to open bank account in foreign countries. "The banks can exchange foreign currency up to $1,000 provided the beneficiary supplies credible source of foreign exchange with identity," according to the Monetary Policy that has increased deprived sector lending to 3.5 per cent, though in phase-wise manner to increase this rate by 0.5 percentage point for next two years due to failure in directing lending towards productive sector and deprived sector
The Policy has addressed the crisis of trust on banking channels by extending deposit insurance up to Rs 200,000 to commercial banks as well to make the small depositors feel safe. The banks and financial institutions deposits have also seen a rise of 8.2 per cent to Rs 788.72 billion by the end of fiscal year.
However, the foreign exchange reserve has increased by a mere Rs 2 billion in a fiscal year to Rs 270 billion in the fiscal year 2010-11 from a fiscal year ago's Rs 268 billion.
Though, merger has become a buzz word in the recent days, the Monetary Policy has offered nothing to encourage mergers. Apart from encouraging the banks and financial institutions to open branches in the selected nine districts, where there is no access to finance, the Policy has increased the deprived sector lending and directed to banks and financial institutions to include a collateral free loan of up to Rs 200,000 for the study of technical education under deprived sector lending.
The micro finance institutions will also be encouraged to go to the districts, where there is no financial access, it said.

Monetary Policy target for the fiscal year 2011-12
Growth: five per centInflation: seven per cent
Broad Money Supply: 12.5 per cent
Balance of Payments surplus: Rs 5 billion
Deposit growth: 13 per cent

Achievement in fiscal year 2011-12
Growth: 3.47 per cent (by the first half of FY)
Inflation: 9.6 per cent (by the first 10 months)
Money Supply expansion: 3.7 per cent (by the first 10 months)
Balance of Payments: Rs 1 billion surplus (end of fiscal year)
Foreign Exchange Reserve: Rs 270 billion (end of fiscal year)


Fiscal Policy keeps mum on cooperatives
The Monetary Policy is silent on cooperatives supervision and monitoring as spelt by the budget. The Monetary Policy is supposed to support the budget – the government's Fiscal Policy – however the central bank is in a fix by the government obsession to the cooperatives and bringing them under the central bank.
The government has without homework and consultation has asked the central bank to monitor the cooperatives but the banks and financial institutions come under the Nepal Rastra Bank Act, Bafia and Financial Crime Act, whereas the cooperatives are under the Cooperatives Act. The NRB Act does not allow the central bank to monitor let alone punish the cooperatives.
The central bank – the regulatory authority of monetary market -- currently supervise and monitor 219 banks and financial institutions including 31 commercial banks, 87 development bank, 80 finance companies (78 in operation), and 21 micro finance development banks.
At a time, when the central bank has not been able to supervise the banks and financial institutions that it has licenced due to lack of enough manpower has been asked by the government to supervise the cooperatives that could lead to more casualties.
The central bank board members are against the inclusion of cooperatives against the NRB Act under the central bank.

Central bank enforces PCA on Capital Merchant Banking and Finance

The central bank's board today enforced Prompt Corrective Action (PCA) on Capital Merchant Banking and Finance and also decided to call back its management from Madhyamanchal Grameen Bikas Bank.
Capital Merchant Banking and Finance now cannot distribute dividends and increase salaries and incentives of employees, apart from barring of new branch opening.
On June 24 Capital Merchant Bank and Finance Company pulled its shutter down citing acute cash shortage.
Capital Merchant Bank and Finance Company -- that was facing acute shortage of cash had also applied to the central bank for special refinancing facility and central bank team was studying its books. But the team discovered many fake borrowers' accounts and rejected it refinancing.
The central bank's special refinancing indow is for the financial institutions that maintain good corporate governance but lacked liquidity.
The class C financial institution -- that has 12 branches including its head office at Battisputali in Kathmandu -- has posted Rs 40.84 million profits in the third quarter and Rs 52.43 million profits in the second quarter, according to its published unaudited report.
The finance company that has Credit to deposit (CD) ratio at 82.84 per cent by the third quarter has Rs 935 million paid up capital. It has also floated shares that were traded at Rs 132 per unit at the secondary market last time.
Similarly, the finance company has to continue to return deposits to its depositors but cannot collect deposits.
The central bank enforces Prompt Corrective Action after the company’s cash reserve ratio dropped below four percent. According to the central bank directives, finance companies have to maintain cash reserve ratio at a minimum of 11 per cent. But those failing maintain required cash reserve ratio level are declared crisis-ridden.
Capital Merchant has been enforced with Prompt Corrective Action giving a chance to improve its financial health.
Similarly, the central bank has also decided to call back its management from Madhyamanchal Grameen Bikas Bank and let it run itself.
The central bank after the Unity scam -- a ponzi scam -- has sent its management led by Rebati Prasad Nepal to manage the rural development bank.
But after a long discussion, the central bank today decided to call back its staff and let the rural development bank run on its own, according to the central bank.

Capital Merchant Bank and Finance Company pulls shutter down

Yet another finance company -- Capital Merchant Bank and Finance Company -- pulled its shutter down today citing acute cash shortage.
However, spokesperson of the central bank Bhaskar Mani Gyanwali said that management cannot shut down whole operation and stop payments with an excuse of liquidity crunch.
"It is illegal," he said, adding that the central bank had been monitoring the finance company since last week. "We have instructed its management to resume operation and they have also expressed commitment to try their best to recover loan and pay its customers," he added.
Capital Merchant Bank and Finance Company -- that was facing acute shortage of cash from last one week -- has also applied to the central bank for special refinancing facility and central bank team was studying its books.
"After a week-long wait bowing to the pressure of withdrawal, we decided to close down," said a senior official of the finance company without wanting to be named.
After closing the transaction, they went to the central bank to ask for rescue package.
The bank's management and central bank along with Nepal Finance Companies' Association today held discussions on the possible rescue of the class C financial institution -- that has 12 branches including its head office at Battisputali in Kathmandu -- has posted Rs 40.84 million profits in the third quarter. It has posted Rs 52.43 million profits in the second quarter, according to its published unaudited report.
The finance company that has CD ration at 82.84 per cent by the third quarter has Rs 935 million paid up capital. It has also floated shares that were traded at Rs 132 per unit at the secondary market last time.
President of Nepal Finance Companies' Association Rajendra Man Shakya, who was in the talks, however, said that the central bank has to release special financing facility quicker to rescue the financial institutions.
The central bank on June 9 had opened a 'special' refinancing window for banks and financial institutions under lender of the last resort to avert systemic risk from tight liquidity situation.But the central bank has set good governance as the condition to get the special refinancing facility for the four months period against good loan at 10 per cent interest rates.
"The central bank seemed little reluctant pushing the financial institutions to closure," another finance company that has applied for the special refinancing facility said.
"Though, refinancing facility is a short-term measure, there is no alternative for the moment," Shakya said, adding that the central bank should bring a long term strategy to solve the crisis.
Due to low depositors' confidence deposit mobilisation could not grow at the rate it used to grow in the past years flaring a series of failures of financial institutions.
On one hand, the financial institutions that are heavily dependent on institutional depositors have been facing problem due to Assets Liability mismatch and on the other bad corporate governance has also plagued some of the financial instutitons.
Last week, the Parliamentary committee has also directed the central bank to prepare a work plan to avert the systemic crisis in case the current liquidity crunch prolongs.

Frozen land price, market distorting decision led to liquidity crunch

Government’s market distorting decisions, low spending coupled with frozen land prices led to the current liquidity crunch, according to economists.
"Land prices must be allowed to collapse so that frozen assets thaws and starts generating liquidity," according to former finance secretary Rameshwor Prasad Khanal.
"Without price collapse market dynamism is not possible," he said, adding that maekrt players should be ready to face losses but central bank must not help banks and financial institutions minimise loss by generous refinancing.
However, in the short term, refinancing alongwith strong reform plan would allow them time to recover cash from their frozen assets," the former bureaucrat added.
Though, he did not rule out the possibility of some development banks and finance companies' collapse but that could be prevented by pushing them to merger, he said.
The financial institutions should go for merger as soon as possible that is good for economy and financial health of the institutions.
Central bank has also termed the refinancing as a short term measure. In the long run, they have to manage their portfolio and assets liability mismatch as the current liquidity crunch is a result of lack of management of assets and liabilities.
But the brighter side of the current crisis is that the total banking assets has not eroded in the recent four months. "There was erosion in the past year, but the banks and financial institutions are slowly recovering," Khanal said, adding that aggregate Credit to Deposit ratio is close to 90 per cent meaning, even if there is aggregate value loss of 20 per cent too, the depositors money will not be in risk and they do n to fear.
But depositors are not yet confident on the financial institutions due recent series of ''bad news''.
"People's confidence has not been restored yet," Prof Dr Bishwhambher Pyakurel said, blaming the government for market distorting decisions lately. “The root cause of recent trouble is politics-led economy," he said, adding that the political leadership is not accountable to the people but to the party. "The government itself is responsible for the current crisis."
Had the fiscal policy supported, there would not have been liquidity crunch, he said, blaming 'partly' to the financial institutions also. "In some institutions there is excess liquidity and others are in trouble,” Pyakurel added.
The bankers, however, blame low government spending for the current liquidity crunch. "Accelerated government spending could help but slow government spending is not the only reason of current liquidity tightening," Khanal said, adding that unspent government money always remains in the government system. "It goes to the market through open market operations and it helps lubricate the market helping generate more liquidity."
"The government -- especially the finance ministry's -- apathy towards economy is the grave concern currently as it has put the economic agenda at the back burner," said entrepreneur and CA member Binod Chaudhary.

People's Finance executive chairman on the run

The central bank is seeking police action against People’s Finance executive chairperson Chhabilal Bhusal, who is believed to be on the run from last two days.
The central bank board this evening was forced to take the decision after the finance company today suddenly sought Nepal Rastra Bank’s permission to close daily transaction due to liquidity crunch.
“Due to technical reasons, we have closed our daily transactions today,” People’s Finance chief manager Keshab Prasad Bhattarai told The Himalayan Times.
According to him, one of the technical reasons is liquidity crunch. Its cheques have been bounced lately forcing the company to close its daily transactions.
“We will start operation after our executive chairman Bhusal — who is on leave since last two days — returns tomorrow,” Bhattarai said, without elaborating how will the finance company manage to pay its clients from tomorrow.
The Class C finance company established in 2049 BS was heavily exposed to land and real estate as its loan exposure to the sector is around 60 per cent, according to a source.
A team of central bank today went to the finance company’s headquarter in Tripureshwor, Kathmandu to get the first hand information on its financial status.
“The company — that had distributed 7.5 per cent cash dividend from the profits of last fiscal year — has a liability of around Rs 900 million but it has only Rs 2.5 million cash with it,” according to the primary report.
In the third quarter of the current fiscal year it has reported Rs 6.48 million profits. Its Non-Performing Loan has increased to 3.07 per cent from 2.48 per cent of previous quarter and 2.14 per cent in the same period of the last fiscal year, according to its unaudited report of the third quarter of current fiscal year. “Its CD ratio stood at 88.57 per cent.”
Established in 2049 BS the Class C financial institute has an authorised capital of Rs 1 billion divided into shares of Rs 100 each. It has the paid up capital of Rs 268.8 million. Of the total paid up capital 51 per cent is owned by promoters and rest is issued to the public.
In the last three months the company’s 50-unit of share changed hands through five transactions at the highest price of Rs 225 and lowest of Rs 209 per unit share. According to its unaudited results, its earning per share (EPS) stood at Rs 2.25.

Bhattarai new CEO of Gurkha
KATHMANDU: The central bank board on Monday evening approved the appointment of Krishna Kumar Bhattarai as the CEO of troubled Gurkha Development Bank, apart from approving Rs 1.2 million loan on four per cent interest for the central bank's employees.

Liquidity crunch leading towards credit crunch

Liquidity crunch is leading to credit crunch, according to the bankers.
"The liquidity crunch has forced the banks to delay already committed loans also," said a member of Nepal Bankers Association (NBA).
Unlike the bankers expectation that tight liquidity situation will improve from April, the situation is still not yet comfortable.
Delayed budget coupled with government’s inability to spend led to liquidity crunch in the financial sector, the banker said, adding that normally the banks face tight liquidity situation for two months every year "but this fiscal year, it has lengthened to almost one year."
Due to liquidity crunch banks are not being able to finance automobiles let alone productive sector and housing sector – a separate portfolio created by central bank on request of housing developers for easy financing facility.
Due to tight liquidity situation, some 300 vehicles have been stranded at Birgunj customs as the banks have stopped financing automobiles. "It has also hurt government coffer as automobiles is one of the key contributors of the revenue," Automobiles Dealers Association president Saurav Jyoti, said, adding that automobiles import has plunged by 40 per cent.
Similarly, housing and real estate sector is also bearing the brunt of tight liquidity situation. " in 2009-10, not a single project has been approved due to tight liquidity situation, though demand for housing is rising ,” vice president of Nepal Land and Housing Developers' Association Om Rajbhandari, said, adding that in the last seven years, only 33 housing projects have been approved.
However, the government officials and central bank do not agree. “The banks have been lending for a longer period and collecting short term deposits creating a deposit-lending mismatch that is one of the key reasons of tight liquidity," according to senior economic advisory of Finance Ministry Keshav Acharya.
"The government treasury has Rs 6.47 billion surplus by the nine months of current fiscal year, he said, adding that the amount is not that huge and on top of that the banks are buying development bonds but not interested in repo that could have injected liquidity.
“They have bought Rs 2 billion worth repo, while the central bank had issued Rs 5 billion repo last week," said central bank spokesperson Bhaskar Mani Gyawali. "Had there been tight liquidity situation, the banks would have bought Rs 5 billion worth repo," he said, adding that, on the other hand, the central bank received Rs 7 billion worth application for Rs 5 billion worth development bond last week.
Though, the bankers are claiming that Credit to Deposit ratio has gone up, central bank governor Dr Yubraj Khatiwada claimed that the CD ratio has not gone over the board. "All the indicators including CD ratio of commercial banks are sound," he said, adding that there is, however, mistrust among the banks themselves and bankers’ belief that deposit growth rate will remain constant has led to today's tight liquidity situation. "They lent aggressively believing that the deposit growth rate will remain constant," he added.
According to central bank data, the commercial banks have Rs 647 billion worth deposit by the May end. By the end of last fiscal year, they had Rs 617 billion worth deposit. "The deposit growth rate has slowed down," the governor said.