The latest news about People’s Finance deposit withdrawal suspension is ominous. All this comes close on the heels of the regulator’s action on Gorkha Development Bank, Samjhana Finance, Nepal Share Markets and a couple of others. This is unprecedent in many ways, as never before had such stringent action been taken on so many financial institutions in quick succession. The run on NB Bank some five years ago is now almost forgotten. The case of Nepal Development Bank subsided smoothly without any domino effect. Lumbini Bank successfully emerged out of the danger zone.[break]
The current situation is not like anything seen before. It is definitely different and requires different treatment. The reason that led People’s Finance to announce such a dramatic move was, among other things, sudden withdrawal of institutional deposits. Conflicting statements and unnecessary proactiveness by the Ministry of Finance also seem to have aggravated the panic.
This is no ordinary situation. Nevertheless, if due caution is exercised things have not yet reached the point of no return. It’s very much under control -- can be brought under control. What the market needs now is some sort of comfort. The policy directives that NRB issued some 16 months ago in the wake of recklessly wild realty sector lending and the clear defining of “prompt corrective action” triggers prevented much of the “freefall” risk. The market has since been tamed. The recent panic outbreak is only due to the remnants of past misdeeds.
The period until the end of this fiscal year is critical. We all have a role to play and we all need to be cautious and careful. This is no time for blame games. The focus should be on how to rescue the situation from further erosion of confidence. Patience is key, but this should be combined with prudential measures that the current situation demands.
One thing is for sure: land prices will not rebound to the level seen at the peak of the property market boom a year and 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 land values do not justify the worth, from whichever angle you analyze it. Some land prices have reached such a level that the present value of all future--highly optimistic--cash flows (even including the speculative element) discounted at almost zero rate of interest is far less than the upfront price expected for the plots of land in question. No sane person would again pay the same price; last year’s frenzy buoyed by cheap credit was something different. Markets do not always behave that irrationally. Our banks certainly know about Japan’s property market boom. The upmarket Ginza district of Tokyo rose to such a level in 1989 that the prices have never been even close to that range in the 22 years since. Losses eventually follow; the sooner you realize that the better. In spite of this, we all need to be careful that a domino effect does not get us under its grip. A careful approach by each stakeholder would prevent further erosion and gradually help recovery.
Ministry of Finance: It is better you don’t speak a word. Your words don’t make much sense, and in recent weeks whatever you have said has only added fuel to the fire. Have faith in your governor and the NRB board. They are competent. Do take briefings, get the full update but leave it to NRB to lead.
NRB: You are also part of the problem. Your one wing reported that a particular bank or financial institution was problematic while another wing sought interest bids for its deposits to be parked. And when you suddenly withdrew your deposits, you aggravated the problem. Please stop that, and your future deposit decisions should not be based on what kind of interest you fetch. Remember, junk bonds fetch higher interest. That is why they are junk bonds. For the time being, do not withdraw a single penny from any entity where you have deposits. Take help from the Ministry of Finance to ensure that other institutional depositors that are in an arm’s length relationship with the government do not withdraw deposits in quick succession.
But some financial institutions must close. Those that cannot be rescued and have seen all their assets evaporate must be liquidated. But be careful. If any such financial institution or bank has the potential of triggering a domino effect, it is better to prop it up through whatever means. Lehman Brothers’ collapse has taught us enough lessons.
The current liquidity problem has reached a stage that cannot be tackled through open market operations alone. The refinance mechanism needs further fine tuning to make it more responsive to current needs. Be generous with refinance for banks and financial institutions (BFIs) that have hope of recovery, but at the same time ensure that the BFI concerned has a time-bound reform plan. This includes, of course, the removal of executive chairpersonships at BFIs. With the same person playing two roles, the check and balance mechanism at top level management has become weak and much of the current woe emanated from this managerial regime. Reform plan also includes merger plans and, if need be, a safer and less painful liquidation where the shareholders alone assume the burden. Do not say anything that sends wrong signals to the market. Speak only what you really intend to do.
Monitoring needs to be intensive for the next couple of months. Keep a close eye on urban so-called financial cooperatives. They are the worst players in the market and might try to fish in troubled waters.
Not all of the property market is in serious danger. The culprit is only the “speculative land” subsector within the property market sector. There is stagnation in the market for residential housing, commercial complexes and office complexes, but this can rebound. One needs to be watchful, but holding on to these for the time being can help prevent losses. Refinancing this subsector can also help. But when it comes to the speculative land subsector, please encourage banks to liquidate sooner rather than later. The aggregate loss of the market as a whole may not be that big as some people will recover a portion of it from past windfall gains.
Most importantly, do not blame BFIs for the time being. Your counseling and a pat on the back will build confidence in the market.
Bankers: You know the why and where of the problems. Even NRB surveillance cannot uncover everything before it all bursts open, no matter how competent and qualified the financial sleuths they employ, if the chairperson-cum-CEO issues deposit slips for millions of rupees accepted and pockets the cash without leaving any paper trail. This is what you know. And if this is what you are faced with, then kindly get your books back in order and if you need help go to NRB and confess the problem.
Aggregate deposits have not evaporated. They have just switched accounts. BFIs that have experienced recent spikes in deposits must realize that this is coming about after withdrawals from someone else in their own fraternity. In place of lending it out, come forward to help those in need through slightly generous inter-bank operations.
Each BFI should also see to it that “speculative land” loans are liquidated quickly, no matter what the prices. This market needs some lubrication and price is the least important consideration. However, you can think of repackaging housing loans and helping borrowers to come up with a better marketing strategy. There is still scope in the office complex market. The residential housing market slump will soon recover.
If the problems are deeper, work out a plan for merger and implement it. Go out and speak to like-minded partners. The position of chairperson or CEO is least important if survival is in question. Healthy BFIs can look for takeovers during this time. If there is no other way out then it is better to go for voluntary liquidation after paying out all depositors.
Depositors: Do not go by hearsay. Do not make panic withdrawals. Trust that NRB will not let you down.
Khanal is a former finance secretary.
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