Till mid-May, commercial banks were sitting atop deposits of Rs 796.7 billion, a hike of 23.64 percent since mid-May 2011, while development banks saw deposits surge by 26.78 percent to Rs 107.8 billion in the same period, latest Nepal Rastra Bank (NRB) report shows.[break]
But finance companies, which had deposits of Rs 85.64 billion till mid-May 2011, saw the amount shrink down to Rs 78.91 billion by mid-May this year, as people who had ploughed money into these companies to take advantage of their higher interest rate removed cash after few of them faced severe financial problems.
The central bank data shows that most of the money had disappeared from fixed deposit accounts of finance companies, as these accounts recorded flight of Rs 9.7 billion in one-year period through mid-May. These companies were able to recuperate part of this loss through addition of Rs 3.8 billion in savings deposits, but this was not enough to offset the total shortfall.
“People are nervous about parking too much money in finance companies these days because of troubles faced by a few finance companies,” said Chinta Mani Bhattarai, vice president of Nepal Finance Companies Association, referring to Capital Merchant Banking and Finance, Nepal Share Markets and Finance, and People´s Finance that faced NRB wrath for failing to maintain financial prudence.
Statistics of the central bank shows that financial condition of many finance companies that were later declared ´troubled´ had deteriorated at a dramatic pace.
For instance, non-performing loan of Nepal Share Market and Finance, which stood at 1.59 percent of the total credit portfolio till July 2009, had surged to 56.98 percent by May last year. Likewise, Samjhana Finance, which had carried zero bad debts in July 2009 and was ranked No. 1 by the central bank in its report, was facing liquidation in less than two years after the report was published. It was the same with Capital Merchant Banking, whose non-performing loans stood at 2.69 percent in July 2009 but soared to 21.04 percent by April 2011.
“These problems cropped up because of failure to maintain good governance,” Bhattarai said, referring to cases of involvement of promoters in embezzlement of funds, which tainted reputation of finance companies. This propelled institutional depositors like insurance companies, Nepal Army, Nepal Electricity Authority, Employees Provident Fund and Nepal Telecom, among others, to shift their funds from these companies to commercial or development banks.
Since institutional depositors, until a year ago, used to contribute up to 40 percent of total deposits of finance companies, many finance companies were hit hard. “Since then, many are still struggling to attract depositors,” Bhattarai said, clarifying that such institutions make up only 20 percent of the total finance companies. “Others are doing fine and are reporting marginal deposit growth.”
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