Easing liquidity in the banking system might be a good sign, but given that the easing is the result of low confidence of the public toward financial institutions that operate at the lower tier, the situation draws serious concern. Banking and financial system that functions like lifeblood in the economy has diverse players ranging from a district-level finance company to national level commercial bank. Each of these tiers plays crucial role in keeping the money rolling and turning the market vibrant. Any imbalance in any tier causes negative impact on the clients they serve and contribution they make to keep the economy moving. So the Nepal Rastra Bank (NRB) must be serious toward tackling this new infection creeping in the system.
Over the past few years, BFIs that are categorized in different tiers like category A (commercial banks), B (development banks) and C (finance companies) along with unsupervised savings and credit cooperatives competed with each other in attracting public and corporate deposits by offering high interest returns. As slow economic growth, poor development spending, weak investment, stagnant job opportunities and high inflation dragged down savings, these institutions fundamentally fought each other to win deposits from the same pie. And they, particularly category B and C institutions, invested heavily in lucrative but vulnerable real estate to earn higher returns. But following NRB’s corrective measure, institutions that overtly exposed their lending to the real estate sector are facing problems in liquidating their loans.
While more than a year old liquidity crunch was already making depositors wary, recent disclosures of irregularities by the promoters and chief executives in B and C category institutions has rattled them. And irresponsible acts by the managers of Gurkha Development Bank, Nepal Share Market Finance, People’s Finance and Capital Merchant Banking and Finance that shut down the services without any notice caused panic among depositors. As a result, people are showing little confidence in small institutions and are massively moving their savings to commercial banks, inviting untimely and in most cases, unnecessary troubles in the system. This panic is unnecessary and must end.
As crucial players at lower tiers, finance companies and development banks have been serving low-end borrowers and offering small but critical services that commercial banks generally do not provide. Hence, NRB should categorically address the problem and assure the depositors that not all financial institutions are in bad shape and the deposits are safe. Also, it must support the cash-strapped good institutions. In case of institutions that have turned sick due to promoters’ wrongdoings, NRB must assure public that it will take corrective measures and rebuild public confidence.