Featured, Market Watch

Tulip Effect & Nepali Bank Crashes

Published by Octron on May 17, 2011

Guest Article by Third Eye

If you have not read the tulip effect of Holland, then you should read it. [Read Abbridged Version Here]

Nepali market is following the same thing currently which is causing loss of more than billions of rupees every day be it in stock market or realty market .Tulip effect is a true incident which prominently highlights how a hype creates an inflation and finally economy crashes when hype subsides. The recent, US economy recession is also good example of tulip effect. People started investing in real state without any knowledge of the property value. Despite such a fresh example, Investors in Nepal didn’t pay a heed and today are just repenting.

Time change, political scenario has changed but problem persists.

So far as I understand, the economy crashes;

i. When people starts buying stuff at price more than its worth (value based upon past and future).

ii. When people starts buying stuff at price more than they can afford at the moment (assuming they can pay the debt with their current income in years to come)

The current trend of crashing of banks, merger scenarios is just the start of the crash domino effect. When realty market was green, everyone hopped into its wagon investing everything that they had. After all real estate is one of the oldest forms of assets that people know about, that hardly depreciates.
It was not just normal civilians, but even banks started betting upon realty market to reap good returns quickly. When I say bank, its the group of some CEO level people who for the self benefit misuse the depositors money breaking the banking code of conduct. Cooking books every quarter with nominal and progressive profit margin was enough to shut the mouth of NRB auditors.

The new game had already begun; bankers now were not content with the hefty bonuses and remunerations. When the bank made profit, it had to be shared with its shareholders but when one or group of CEOs made profit it had to be shared among fewer people, they would often throw small pie of profit to the bank profit and loss statement as interest income. Everything looked honky dorky until, each and every bank started (mal)practicing.

To worsen the situation, entry of numerous development banks, finances and cooperatives just made the field dirty. They too started joining in the fund mismanagement game. Commercial did banks try to fight back against these cooperatives and finances by alluring the depositors higher and competitive interest rates to rack in greens from depositors in order to maintain their liquidity, but it just started another rat race. Every month they had to bring in new deposit scheme increasing the interest rates bar just to withhold their existing deposits. The increase in depositors interest significantly increased the loan interest rates to something that borrower had never dreamt of, finally causing defaulter problem.

As more and more borrower defaulted, the bank got more and more into trouble. The mismanagement of cash by top level brass was slowly surfacing due to huge deficit in cash. The realty investment tightening by Government and NRB was more than enough to crash the highly inflated realty market. A domino effect of progressively lower and lower prices took place as everyone tried to sell while not many were buying. Finally, crashing not just realty market but banks and civilians whose money was invested into the realty market.

This is what caused recent bankruptcy of the banks; Gorkha Development Bank, Samjhana Finance and NSM are just the few which were revealed in last few months but there is a long list finances, development banks and even ‘A’ class commercial banks who invested in the realty market (by mismanagement) and will soon follow aforementioned banks path soon.

So, what are we normal investors and depositors supposed to do ?

Proper management of your assets is essential at the moment. You need to spread your assets in proper way in order to avoid loss of your investments.
If you have high liquid assets like Cash Deposits in banks, FDs then transfer them to reliable and old banks rather than new or the ones who claims to give high interest rates. Also don’t put all your eggs in the same basket. Spread your cash into multiple bank accounts or put it in a locker for some time.

We will delve in detail in next featured article how to covert your liquid assets into investment with minimum risk.
As for now, Don’t fall victim to the higher interest rates and freebies from the soon to crash banks.

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