The opinions expressed herein are those of the author’s and are not held by The Week, unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other forms of advice.
You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation. Any information you provide may be used on The Week/Moneywise and other Nepal Republic Media Pvt. Ltd sites.[break]
Starting from this issue, The Week brings to you “Moneywise,” a new biweekly series where Suman Joshi, CEO of Laxmi Bank, will tackle questions, simple and serious, about money.
If you have a personal financial question for Joshi and would like to see it answered in “Moneywise,” either leave it as a comment on the post online, or email it to us at theweek@myrepublica.com and the best three questions will be answered in each biweekly week.
Meanwhile, here’s a foretaste to our new biweekly series:
My children think I’m an ATM and their spending habit is beginning to worry me. How do I instill financial discipline in my kids?
Well, children generally pick up after their parents. They don’t do what you ask them to do; they do what they see you do. Very often, parents don’t realize how extravagant they themselves are but expect their children to spend wisely.
Children, who watch their parents regularly borrow money from friends and families, buy stuffs or take vacations they can’t afford, will grow up thinking it’s OK to live beyond one’s means. So, the most important step in raising money-wise children is for parents to be financially disciplined themselves.
Secondly, please remember that showering your kids with everything they want is not good parenting. I know you want the best for your children. In their enthusiasm to express their love, some parents can’t say no to their kids.
This behavior doesn’t prepare them for the real world in their adult lives. Children need to know that only hard work and good behavior earn them the goodies. Sure, you can afford it, but have your children earned it? Also, take a minute to think about how you’re handing out allowances or pocket money.
Why do you give them allowances in the first place? Is it only because your friends’ children get them? An allowance is your opportunity to teach your children how to respect money.
I’m thinking of approaching a bank to borrow some money for my business. Give me a few tips.
Raising money from external sources brings its own baggage and demands greater financial management skills. So, first and foremost, see if your need for extra money can be fulfilled by improving your cash flow rather than getting a loan.
Can you get your customers to pay you faster? Can you optimize your inventory level so that your money isn’t tied up in stocks and shares you don’t need now? Or, is it possible to negotiate longer payment terms with your suppliers?
Once you’re convinced that you need a bank loan and actually believe that it’ll help you manage your business better, you need to spend some time contemplating the future of your business. Based on what happened in the past, you need to create reports that represent your best estimate of future results.
One key item is cash flow projection. If you approach a bank to borrow money, they will want to see your business plan and your cash flow projection in order to convince themselves that your business is capable of generating sufficient cash to service the loan.
Also, consider the worst case scenario: what if there are more bandas and strikes than you anticipated; what if there are longer power outages, etc. Build contingency plans and share them with the bank candidly.
The first impression your banker carries about you and your business can significantly influence possibilities of you getting a loan.
Finally, before you sign the loan agreement, consider the risks of taking it. If you’re unable to repay the loan for some reason, your business could suffer and your own reputation is on the line. So do read and understand thoroughly the terms and conditions of the loan, including interest rates, fees, duration of the loan, etc.
I hear banks are now flushed with funds but why haven’t interest rates on loans dropped?
Having experienced a severe liquidity crunch this time last year, banks have been able to increase deposit volumes significantly over the last six months and are currently “flushed with funds,” like you’ve mentioned.
Timely passage of the national budget, improved confidence on the banking system post-currency note shortage a couple of years ago, relaxation on the threshold for income declaration were a few of the contributing factors.
Last year’s liquidity challenge also triggered a more stringent regulation from the Central Bank which now requires banks to maintain a credit deposit ratio of 80%.
This roughly means that banks can lend only 80 Rupees for every 100 Rupees they raise as deposits. (Capital held by banks is also considered but I’m ignoring that here for the sake of simplicity and because the impact is not material enough, as foreign currency deposits are to be excluded.)
So banks now have to set interest rates in such a way that 80 Rupees given out as loan yields sufficient revenue to cover the risks and to service a deposit of Rs 100. Banks are paying lower interest on new deposits but the ones mobilized in the past still cost them higher.
The overall cost of deposits is therefore still higher than what current rate structure indicates. Such a lag effect is a common phenomenon in banking business.
The Rs 20 that banks cannot lend is invested in government bonds, interbank market and parked in non-interest bearing account at Nepal Rastra Bank.
Now, interbank market has gone to sleep because all banks have sufficient liquidity, and yield on government bond – mostly treasury bills – have dropped to below 1% p.a. – these rates were as high as 8–9% sometime back.
You need to understand the double whammy of tighter credit deposit ratio and rock bottom returns on the balance of Rs 20. Banks today earn much less interest than last year in spite of some increase in loan portfolio.
Competition within the banking sector is quite keen and you can be rest assured that it’s always reflected in the rates of interest they apply.
Market forces work very well in Nepal when it comes to loan pricing. Reductions are already happening for short-term loans.
Loans generally will become cheaper once banks are able to reduce their cost of deposits and once they are satisfied that liquidity crunch experienced in the past won’t recur in the near future.
Related story
Moneywise: Ask Suman Joshi
