CRISIS IN BANKS Banking on (Un) Real Estate

In a matter of three months, half a dozen banks and financial institutions (BFIs) have become troubled one after another. The collapse of the property bubble is seemingly pulling them down. As over Rs 100 billion of their investments are locked up in

June 17, 2011, 5:45 p.m. Published in Magazine Issue: Vol. : 05 No.-1 June 17-2011 (Ashar 03,2068)

Few years ago during the heydays of real estate growth, the Vibor management was looked up as an example of innovation. Their investment spree in lucrative real estate was returning huge profit that made others salivate.

Today, the same people are criticizing the bank management for their failure to read the writing on the wall.

As a national level development bank, Vibor had been gaining credibility. But the last week’s turn of events show how fragile their situation always was.

“It is quite clear that most of their credit investments were on real estate sector – up to 60 percent. And they were managing day-to-day liquidity by the deposits from a handful of big depositors. Once those deposits were withdrawn, they went bust,” said a source at the central bank.

It was after the Nepal Rastra Bank (NRB) decided not to renew its fixed deposits of Rs 270 million followed by the decision of Nepali Army (NA) to save its deposits that the Vibor had to run for cover.

“It was during the time when the US economy became crisis-ridden due to burst in real estate that BFIs in Nepal were on a rush to invest in lands. The Nepali bankers, too, should have calculated the possible risks. They did not,” said an economic analyst.

The Vibor management does not agree. In their website they have posted an information stating that only 22.62 percent of their credit is invested in real estate.

For the time being though, the NRB’s decision to provide Rs 500 million worth refinancing by acting as lender of the last resort has stabilized the condition of Vibor and it has already started collecting individual deposits as well. But is the problem solved?

No, say most bankers and analysts.

Crunch of Liquidity

“In my banking career spanning almost three decades, I have never seen this kind of liquidity crunch,” the remarks of Ashok Rana, president of Nepal Bankers’ Association, sums up the severity of the crisis.

And there are multiple reasons for such a crunch. First and foremost is the continuing political instability that has hurt the smooth implementation of budget. As around Rs 30 billion of the government’s fund still lies unutilized due to its inability to carry out development works, the market has remained squeezed.

“The budget must come on time and be implemented for this crisis to be resolved once and for all,” says Rana.

On the other hand, huge chunk of BFIs’ money are locked up in real estate investments. As they see the property prices falling, nobody is willing to sell them off at a loss for the time being.

This also has added to liquidity problem. Writes former finance secretary Rameshwore Khanal, “One thing is sure, land prices will not rebound to the level seen at the peak of the property market boom a year and a half ago. The current problem is due to adamant behavior by market players holding on to the same prices, thus freezing much of the liquidity that the market could generate.”

The real estate agencies have been saying that following the decision by the central bank asking the BFIs to reduce their exposure to the real estate (the BFIs have been asked to bring down their real estate credit to below 25 percent of total credit within mid July this year), they have witnessed a free fall. “Transactions have decreased by almost 90 percent,” say the agencies.

The central bank officials say that their decision to limit real estate investments were correct. “It could have worsened had we not acted on time,” they say.

The central bank officials also claim that liquidity crunch is not as severe as has been made out to be. “We released repo worth Rs 4 billion on June 12 but only Rs 1 billion worth of repo were subscribed. This shows that there is no huge demand for liquidity,” said Bhaskar Mani Gyawali, spokesperson of the NRB.

But bankers say that since only class A commercial banks can use the repo facility while the worse sufferers are class B and C institutions, the repo may not have been subscribed fully.

House of Cards?

Three months ago, the Gorkha Development Bank became troubled after disputes among the management itself. It was followed by the liquidation of Samjhana Finance.

Then came the story of outright fraud and book manipulation of around Rs 1 billion in the Nepal Share Market whose chief is still said to be absconding.

No sooner than these stories had died down, there came the story of People’s Finance and Vibor.

Does the current spate suggest the BFIs are going to fall like a House of Cards?

“Not at all,” says Ashok Rana. “Many may come under stress, but if the banks and the NRB work together, we can come out of this crisis.”

But he agrees that there may be systemic problem in the banks, particularly the class B and C ones where, he says, the NRB oversight is not as strong as in class A ones.

The NRB officials, too, dismiss the fears of full-blown banking crisis. “We must see that the problems of not all of these troubled institutions are same. While Vibor suffered from liquidity crisis, Nepal Share Market and Samjhana Finance suffered from bad corporate governance,” said Gopal Kafle, deputy governor of the central bank.

Whatever may be the correct answer, one thing is quite clear. The worst impact of the current crisis will be the evaporation of public trust – that single most vital thing on which banks are actually based upon.

And that trust is not going to be restored anytime soon.

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