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Wake up: NRB, Bank & Depositors

Published by Octron on June 9, 2011

4 Financial Institutions crashed within one month; NSM, People’s Finance, United Development Bank & now Vibor Development Bank is the verge of collapse after failure of negotiation with NRB to take over the management. The central bank denied to take over the management of the bank due to huge irregularities, which are yet to come out. Heavy chunk of investment on the real estate has been cited as the major cause of the downfall of the bank.

This is a guest article posted by Third Eye delving more into current start of the crash and how NRB can and normal depositors/stock investors save themselves from the huge economic crash down of the nation nearing us. The following analysis is pure writer’s opinion, reader’s discretion is advised.

Poor Judgment for the Quick Return

When the realty market was on its heydays, it was not only the normal civilian’s and broker’s even banks jumped upon the wagon. Investors grouped together to pool in their chunk and invest on the realty market. More money means more power, with accumulation of more and more money, the price of realty just sky rocketed irrespective of country’s political situation, GDP, economic growth, import and export deviation. As the price rose, the investors needed more money to buy more profitable realty, so they grouped together to open a bank, finance or cooperatives to gather money from normal civilians. Civilians, attracted by these institution’s honey bee marketing tactics swarmed towards these financial institutions for higher interest rates without knowing how and where their money would be invested?

The investors turned bankers were making more profit, as they could use depositor’s money at very low interest rate. Even for once they didn’t think where they were heading by propelling the realty market beyond reality?. They were just happy making huge profit, buying BMW & Mercedes, turning the bank management team into realty brokers. Even after NRB’s regulation to tighten the bank’s loan portfolio in the realty market didn’t stop these investors to keep on investing in realty market by circumventing bank regulations. Despite being educated, they couldn’t foresee the near future crash…

History repeats itself

It would not be wise to compare country like ours to developed country like USA in terms of economic and social structure. Normal civilians in our country are fighting even for basic amenities like Water, Electricity, Sanitation, etc whereas most parts of USA had all these even before 1950s. So, technically speaking in terms of economic and physical infrastructure development we are somewhat 50 – 60 years behind USA.

Please don’t bring in 3G mobile phones, internet, apartments, shopping malls with Rolex & Gucci crap.

Despite such developments, just few years ago in early 2006, the realty market started crashing in USA. Major cause was inflation. People were buying or promising to buy stuff that they can’t afford. Banks were lending money to people to buy stuff that they knew those people couldn’t afford in the form of mortgages, credit cards, minimum payments, refinancing, etc. Till date USA is trying to recover from recession.
Despite such fresh example, banks in Nepal never tried to learn from the biggest recession due to realty crash in recent times. Some banks like Standard Chartered Bank never followed the rat race of hiking deposit interest rates (till date its 2% on normal savings), investing too much on the realty market but most of the banks in Nepal was eager to make as much profit as they can ignoring all risk signals.

Ultimately, the fresh example of USA which can hardly be called as History repeated itself !

Majhi Jo Nau Duboye, To Use Koun Bachaye

Governor from NRB has been shouting loud to big depositors in the financial institutions not be make big withdrawals. All the banks under NRB supervision are safe and sound. In each and every function the governor seems to be chanting those slogans but NRB never was able to give notice to normal depositors which banks were about to crash. Leave the notice to people; they couldn’t foresee and stop those banks from crashing well ahead. Despite so many audits, checking by central banks 4 financial institutions have failed severely within last one month and 8 in last six months.

How couldn’t NRB read the early signs?

It is job of central bank of every country to keep an eye upon every financial institutions registered under it. Why it is only after the banks announce themselves as have gone kaput and closed people come to know about it, while NRB is mum ?

There is one fine song from old Bollywood movie ‘Amar Prem’ sung by Late Kishore Kumar (Chingari Koi Bhadke…), I am using few stanzas’ from it;

Majhdaar Mein Naiyya Dole
Toh Maajhi Use Bachaye…

Majhi Jo Nau Duboye
To Use Koun Bachaye…

Depositors in those banks relied upon NRB with their hard earned savings but never had NRB been able to warn the depositors regarding risk to their savings.
This clearly indicates NRB’s inept auditing skills (due to which banks were able to get away with their un-audited quarterly reports), or the top level of NRB staff have been compromised.

Now where will this take us…

Domino Effect

The news of bank and financial institution crashes will spread like wild fire. Normal depositors along with big depositors like Nepal Army, Provident Fund, Citizen Investment Trust, etc will throng into different banks to withdraw their hard earned savings.

If they don’t what if that bank crashes?
Speculators and NRB’s inept regulations and practice will force people to withdraw!

Last time when Nepal Development Bank crashed, depositors had almost lost their hard earned savings. They had to toil for months queuing in lines, shouting and chanting slogans, fighting with the personnel’s to get their deposits back. Even in recent crash of NSM, people are still queuing up in lines to get 5%-10% of their deposit back on weekly basis.

Now if these depositors start to withdraw their amount, which surely everyone will, even the banks which are in good shape might fall off. Inter-bank lending has already stopped as each and every bank is worried about huge cash withdrawals. NRB has also decreased frequency of REPO.

If these depositors don’t withdraw, they will always be in risk of being next victim of bank crash; defunct NRB has never been able to warn us in advance about any bank crash. So, now domino effect will come into action.

Banks which have enough reserve with NRB, might be able to sustain the flooding of depositors withdrawals, but banks which have given most of their deposit in long term loans like hydropower might face the hard time.

Banks with realty defaulters will be hit hard. They can neither sell those land (collateral) in current time for appropriate value, nor will their borrower be able to pay them any interest. They will have only option to sell those land undervalue and bear loss (i.e. increase in Non Performing Loan).

Now, what if while giving the loan to those realty borrowers the collateral (land, house, etc) was highly overvalued due to lack of knowledge or mismanagement?

Then get ready to see in the news one more financial institution crashing!

Epilogue

So, how can NRB, Banks, and Depositors save themselves from the crash? This is just the writer’s opinion; you may or may not agree to it. The information presented here is not fact but just opinion which varies from person to person.

1. Banks should publish immediately their current state of loan/deposit ratios, their current loan portfolio and terms, past and present revenue source and value.

2. NRB must stop chanting STOP WITHDRAWAL to depositors instead list the banks with their actual and audited financial status. This is one time NRB can show its credibility and power. Inform depositors of any fraudulent and suspicious bank after full research before the bank declares itself bankrupt.

3. Depositors are advised to for time being NOT to run after HEAVY INTEREST RATES. Split their deposits in saving accounts under different family members names (in a trusted bank) or in different banks.

4. The major question still remains how we civilians can know which banks are trusted. Here are some pointers;

i. Banks which are not after rat race of collection deposits. Banks which give low deposit interest rates. In my opinion (SCB)

ii. Banks which don’t have huge realty portfolio.

iii. Study properly the Quarterly Financial Reports of the banks (look for NPL, this quarter amount reserved for loan provision, profit/loss, interest income, reserve surplus, etc columns)

iv. Banks that have been in business for long time have good chance of survival than the new ones, but this does not necessarily mean BIG banks wont collapse. Government backed banks like NBL, RBB have good chance of survival than privately owned banks.

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