January 31, 2017 Sujeev Shakya

Liquidity Mess

In Nepal, the most intriguing discourse resembles talk about not having an umbrella when one knows it is going to rain. To be unsure if it will rain, despite the approaching monsoon season, goes against all laws of nature. In the financial sector, the looming liquidity crisis has now finally hit hard and everyone is looking for an umbrella. Why is it that we are always reactive to crisis, when a couple of months ago the writing was on the wall? 

Lack of Research and Data

In Nepal, the culture of producing and working with data is something alien. While banks grew to a market capitalisation of above $1billion, the importance of having a strong research cell, collecting data and running analytics has always been overlooked. Therefore, when a crisis hits, no one knows how it hit them. If there is no diagnostics based on data, then the prescription is going to be questionable at best. Suddenly, articles appear in newspapers based mostly on opinion rather than on real-world data. In the absence of analysis, there are speculations about what will happen.

Banks started to push deposit rates overnight not thinking of what their lending rates and the impact on inflation will be. The Nepal Rastra Bank has evolved into a control-oriented regulator rather than a proactive market-guiding force which, in the absence of data, is not sure about what needs to be done. With multiple media channels—electronic, print and social—the question is: do you spend your time consuming media content or do you think of how you can find data and explain what is happening?

So the number one lesson is that the financial service industry has to start investing a lot in data and research. There are many capable Nepalis with international experience who can help them with that. And perhaps the industry can begin by orienting board members on why they need to do this to keep shareholders’ investments secure.

Global Standards

Banking in Nepal began with international banks starting to operate in the country, bringing in global standards and practices. Over a period of time, as investing in bank shares became more lucrative than the national pastime of gambling, more banks were founded. This brought about a new, home-grown set of standards. Nepal continued to follow practices like higher short-term deposit rates than long-term deposit rates. So borrowing short term and investing long term remained a hallmark of the Nepali banking system. No efforts to develop long term markets were made as the short term ones generated super profits that shareholders loved. Similarly, embracing global accounting and audit practices like IFRS and stronger credit standards was deferred.

Non-productive sectors became the best ones to lend to. With banks having a lion’s share of the stock market, they continued to lend to investors who were investing in other banks. The systemic risks of this are known, but doing things the Nepali way has made many billionaires. Global standards were rejected in the name of hollow nationalism.

So the lesson number two is that the faster we accept and adapt to international standards—be it about ATM downtime allowance, customer service, or credit, accounting and audit practices—the sooner such crises can be predicted and proactive steps can be taken to deal with them.

From Crisis to Catastrophe

Since there is a lack of data on why there is a crisis and how it will be resolved, speculation, hearsay and comments on social media are driving people’s decisions and reactions. Two crisis scenarios cannot be ruled out.

First, like in the previous cases of some banks and numerous co-operatives, there are rumours about banks’ failure. This can drive depositors to withdraw money from these banks or to not renew their short-term deposits. Banks have lent out medium- and long-term loans and that will put them into serious trouble. One bank facing a crisis like this will have a ripple effect on others. With no dearth of people loving to believe rumours, even Lord Pashupatinath will not be able to help them get over this crisis.

Second, the stock market is already seeing a slide and with the value of shares depleting, there will be pressure on the loans being provided against shares. Many question the basis on which lending is carried out in a market where the price-earnings ratio is very high and defies global practices. The tumbling of banks’ shares means further pressure on stock prices, as supply will increase. This will, in turn, impact liquidity.

Perhaps what is required now is to do some deep thinking based on research and data. The Central Bank can require commercial banks to publish this data. There are global experts available to interpret the trends. One can prevent a crisis from becoming a catastrophe only a few times. Sometimes things can just go out of hand. Basic fundamentals should never be overlooked.

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