Thursday, June 9, 2011

Vibor Development Bank is in trouble

In yet another spate of financial turmoil, Vibor Bikas Bank (VBB) -- a national level development bank -- has become the latest financial institution to seek emergency management takeover by the central bank, Nepal Rastra Bank (NRB) to avert a looming financial meltdown.

A delegation of Nepal Bankers Association and Vibor Bank´s CEO Ajaya Ghimire formally approached two Deputy Governors of NRB Gopal Kafle and Maha Prasad Adhikari on Wednesday and requested for management takeover.

Refusing to take over the troubled bank, the NRB suggested to the members of the NBA to help Vibor by resuming stalled inter-bank lending.

The bankers refused to buy the idea. “The bank is seriously in crisis. Who will risk themselves by providing loans to it against land or house, which are not selling these days?” said a banker.

Here is the full story. Someone named Sam Clifford is placing the whole blame on “acute liquidity crunch”. While Sam chides at the reporter for not checking Vibor’s balance sheet at the office, he does not deny the fact that the bank’s CEO and NBA officials knocked on the doors of NRB for help. This means, plain and simple, Vibor is in trouble right now. You can’t blame liquidity crunch to justify your imprudent investment portfolio that is putting the entire institution in troubled waters. Why are other development banks not pleading for NRB’s assistance? Why is Vibor knocking NRB’s door NOW? It is because it is in trouble and does not have confidence on its own balance sheets. No doubt.

Meanwhile, this is what I wrote in January:

While the latter (NRB) ignored the unhealthy development in financial sector, let new BFIs prop up without even evaluating if our economy needs so many of them, and took damage control measures of late, the former (BFI) is in desperation to survive amidst cutthroat competition, which is getting nasty by the day. The BFIs’ inability to effectively cope with the existingpressure on deposit and lending, and to attain unsustainable profit targets might lead to a situation where all profits are private but losses are social, i.e. taxpayers pay the cost of reckless behavior of few sectors in the economy.

Looking at the existing business structure of the real estate and housing sector and the BFIs, it is very likely that their unjustified growth will end soon, raising fear of destabilizing not only the very conduit from where the public is facilitated with credit but also derailing the entire economy. The existing path on which these two sectors are hurtling toward bears the hallmark of the recent housing, financial, and economic crises in the West. It all starts with pumping of too much money in one sector, which after few years of unnatural and unsustainable growth crashes down and puts pressure on the BFIs, leading to defaults, extremely vulnerable financial institutions, and squeezing of credit to all sectors in general.


The development in the housing and real estate sector and the ad hoc decisions of the BFIs do not augur well for the economy. We might end up with empty apartments and ‘ghost’ houses if things continue to go the way they are going right now. Playing with interest rates on loans and savings is just an attempt to buy time before the inevitable disaster hits the BFIs. It is good to acknowledge and rectify mistakes before it is too late.

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 financial sector, and real estate and housing sector. Before these two sectors put the entire economy at risk, strong safeguards should be put in place. It might mean making painful decision of letting some BFIs to either fail (remember Nepal Development Bank?) or forced to merge, and help to rapidly cool down the urban-centric real estate and housing sector.

I see as situation where profits are private and losses are social in the Nepali banking system. The fault squarely lies in the BFIs (and some to NRB) itself. The financial crisis will deepen further without NRB’s activism to mitigate fears and clamps down on BFI’s indiscipline to manage their own books. Expect more troubled time in the Nepali banking sector.