Tuesday, January 4, 2011

Hypocrisy of Nepali banking sector

Just yesterday the bigwigs of the Nepali banking sector were making a high pitch about the central bank being anti-market, forcing the governor to make a statement that he and the central bank are not market unfriendly. He argued that the central bank is just trying to regulate markets to encourage healthy competition. The central bank has capped executives pay, set loans to realty sector at 10 percent and to housing sector at 30 percent, and directed banks to ensure that interest rate difference on various kind of saving accounts is not more than 2 percentage points.

Now, we have first hypocrites of 2011: bigwigs of the Nepali banking sector! The same bankers who were complaining about “market-unfriendly” practices of the central bank are behaving like masters of cartel by capping savings interests at 4-6 percent. The Nepal Bankers’ Association (NBA) said that “a gentleman’s agreement” has been reached to cap savings rate between 4 and 6 percent. Gentleman’s agreement—WHAT? That is deliberate collusion to manipulate competition and is nothing less than CARTELING, which is infinitely market unfriendly than the central bank’s decision to bring about healthy competition in the banking sector. They played the same anti-market game in May 2010 when they agreed to limit interest rates on fixed deposits at 12 percent.

New commercial banks, however, have been given permission to fix higher rate by a margin of as much as 1.5 percentage point, he said, adding that the NBA will soon hold a meeting of chief executives of all 30 banks this week to formalize its implementation. Once the new decision comes into effect, depositors who were already enjoying as much as 10.5 percent annual interest returns on savings will find their return drop to 6 percent.

This will also reduce the prospect of salary account holders and other accounts holders enjoying far better returns than now. So far, the banks were providing just 2 percent annual interest returns to such accounts holders.Some of the bankers, however, noted that the new move could be risky particularly given the latest trend of customers becoming more interest sensitive and their competitors like development banks and financial institutions offering as much as 13.5 percent.

They increasingly look like gangsters (albeit gentleman-style!) when one looks at the way they have been pressing their demand, resisting regulation, and trying to circumvent central bank’s directives. When will they realize that they are fostering unhealthy competition. They are digging their own hole deeper and deeper by offering too much loan to the real estate and housing sector without properly assessing if the loans are normal or subprime (in fact, they find no difference). They are charging high interest on loans and are in desperation to attract deposits by offering flamboyant schemes, just to meet unsustainable profit targets. First, they attract depositors offering them promises of high interest rates. When money is deposited, they change interest rates without even informing the depositors. Likewise, with the borrowers, who will have no option but to default if the same dirty trick goes on for a year or two.

The real estate and housing sector is going to cool down as supply will far outstrip demand soon. This urban-centric bubble will create ‘ghost houses’ waiting for customers to either rent them or buy them. Prices will come down and the borrowers will not be able to honor principal and interest payments on time. The banks will be in deep trouble due to their proportionally high exposure to one particular sector. Additionally, since the growth of the number of BFIs has proportionately outpaced the growth of depositors base, some of the BFIs will surely go down or will be forced to merge. The entire economy is going to suffer because of the unhealthy competition among BFIs and market-unfriendly acts of the banking executives. The sooner the central bank further clamps down on them, the better it is for the economy. We must be ready to let go some troubled BFIs.

The heads of BFIs have to realize that there are simply too many of them running after more or less the same corporate and non-corporate customers. Some of the BFIs have to either merge or go down under. There is no other option. Playing with interests on loans and capping interest on savings are just attempts to buy time before the inevitable disaster hits them. Wake up before it is too late (actually, it is already late!).The day of reckoning is coming soon.

We are looking for a major financial disaster in Nepal soon, if they go with business-as-usual approach of playing with interests on deposits and loans to attain unsustainable profit targets, urban-centric operation, favorable lending to bubbling sector that has weak foundation, and encouraging trading rather than entrepreneurship. The tendency to seek short term gains over long term sustainability is a recipe for disaster with severe negative externalities, i.e. it will not only affect the BFIs, but also the public who are not a direct party to the activities of BFIs.

One of my senior and a reputed policymaker says, “Can the banks (collude in fixing) play with interest rates as the Nepal Oil Corporation (NOC) plays with the price of petroleum products? What is the difference between BFIs and NOC?” Couldn’t have put the situation any better! They gotta be responsible citizens. Their hypocrisy has to stop.