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STOP investment in FIs!

Published by Octron on April 19, 2010

This is a guest article send to us by Shagun Mahato. All the views expressed in the article is of the author, not NEPSEGuide. If you too are interested in sharing your article please mail to us at editor@nepseguide.com. We would be glad to share with our readers.

Well, believe it or not. Stock market might be on the verge of collapse with overcrowding financial institutions releasing IPOs, right and bonus shares. Normal supply and demand principle itself will give you clear idea, why it’s not good to invest in financial institutions anymore.

1. Mushrooming of Financial Institutions: I remember listening to MAHA’s one prahasan online (London Airport), where Haribasha, a Nepali, gets caught in the London airport in the security check. He tells he is innocent, by swearing upon 33 Crore Gods (Tetis Koti Deuto ko Kasam). Madan Krishna, who was acting as Airport Security, asks what is the population of your country.

Hari replies; “2 Crore”.

Madan says; “Population 2 Crore, Gods 33 Crore, Impossible !”

The analogy is similar to current mushrooming of Financial Institutions. We have more than 25 ‘A’ class commercial banks. Another 50 plus development banks, then there are hundreds of finance and another couple hundreds of cooperatives. Some of these financial institutions have even 50 branches across the nation. Can you imagine, what are they doing?

In a country, where there is very scarce investment opportunity like hydropower or any big industry, how can these FIs sustain?

2. Lack of Investment Opportunity: For every Rupee which comes into a bank, the bank is obliged to pay certain interest to depositor. So, without any big investment opportunities which would help in development of a country, banks are forced to invest in non productive sectors like real state, import of auto-mobiles and other luxury items, etc.

We already know the fate of real state industry in the developed countries. It’s just a bubble, which will burst.
Import of foreign goods, be it oil, gold, auto, etc is actually a divestment rather than investment, it is just a medium for capital flight which will eventually deplete our national reserve from NRB.

The recent directives from NRB, advising banks to retract from real state loans, came very late. Though this might help banks in long term and save them from bankruptcy like USA Banks but in short term its radically hampering banks profit margin. Lack of investment opportunities and cutting off existing options like real state loans, home loans, auto-loans, margin lending against stocks is hitting hard upon even big banks.

3. Skyrocketing Interest Rate: It’s not the loan interest rate which is skyrocketing even the return on FDs is something never heard of in the world. In USA, Bank of America, which just recovered from huge bailout, gives not more than 2.5% interest on FDs, same goes for Citi Bank or any other banks in the developed countries.

Remember Ponzi scheme where Madoff got caught, he was giving not more than 10-15% return. Now think properly, even in a developed country like USA which has best amenities, world class technology, top business minds could not meet 10% return, how could underdeveloped country like ours where there is no big industry or infrastructure afford that ?
Skyrocketing interest rate on FDs is a sign of BIG DANGER !

4. Undersubscribed shares and promoters shares: Each and every bank which could not invest their money in better sectors are already seeing gloomy picture. Promoters of such banks are already off loading their shares. Its not just promoter shares, even the right shares are getting under subscribed. People who have already lost by buying shares in secondary market have no interest to shed off extra Rs. 100/share for right ones.

Can we stop this?

Few years ago in China, the government imposed a law that its citizens cannot have more than one child. Look today, the population has decreased drastically and its economy has improved dramatically. Same goes for stocks in Nepal. Unless we STOP buying these unworthy FIs IPO, Right, Bonus shares the problem will just get bigger and bigger. It will not stop until the bank declares it is bankrupt and we all lose our money.

By buying such shares, we are feeding and keeping these banks alive irrespective its good, bad or ugly performance. Start thinking properly and STOP INVESTING in these financial institutions. Wait for the good industries (productive ones, which would help in development of our country) to hit the stock market. But, GOD knows when that will ever happen ?

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