Here is a nice article from my colleague (we worked worked together at The Kathmandu Post business desk back in 2004/05) Santosh Pokharel, who is currently studying economics at the University of Virginia, about the lessons Nepal’s premature financial sector and the central bank can be learn from the current US financial crisis, triggered arguably by the bust in housing bubble, leading to collapse of powerful investment firms and run on banks.
Bank runs are not new to Nepal. The most recent one happened in 2006, forcing the central bank to overtake troubled Nepal Bangladesh Bank. He predicts that there might already be a bubble developing in Nepal’s share market and real estate market. I won’t be surprised if this bubble bursts (mainly triggered by rising inflation or some banks plunging in trouble) because the tremendous growth in these sectors is not consistent with the average GDP growth rate of 3% in the past seven years.
…The growth in the equity market is good for the overall development of the economy. However, speculative growth where the "fundamentals" of the underlying market are not sound creates a market bubble. There are no economic or financial statistics that supports the current boom in equity and real estate. Considering the growth rate of 2-3 percent for the last five years, a few significant national-level investment projects and a wounded economy staggering out of a decade-long conflict, it's hard to argue against the premise that the current share and land markets are a bubble.
All of this has coincided with the increased exposure of commercial banks and finance companies to equity and real estate. Responding to the public's interest in stocks and real estate, these financial institutions have been providing easy loans to people wishing to invest in them. This has helped to inflate share and land prices and create a market bubble.
…In the Nepali banking context, there are reasons to be concerned about the exposure of commercial banks and finance companies to equity and real estate market. Because of lack of investment opportunities in other sector, financial institutions have been pouring money in real estate and equity market. While unprecedented remittance inflow has helped sustain the deposit mobilization growth even in the light of growing number of these financial institutions, there aren't enough areas for investment outlays to support the growing deposit base. Hence financial institutions don't have much of a choice but to provide loans for investment in equity and real-estate market.
…Anticipating higher returns, people without any background in investment or any professional guidance are taking out loans to invest in these markets. Because of increasing competition, financial institutions are providing loans without proper credit and income check. All of these factors have helped to inflate stock and real-estate prices. However, when the bubble finally busts either in equity or real estate market, there will be an immediate impact on the balance sheet position of these financial institutions.
