The financial sector in Nepal has certainly seen better days. We’re witnessing a low point for this industry and are possibly heading to some turbulence. The reasons are many. A few among them are: excessive competition (read too many banks), poor supervision, and governance failures in a number of cases. [break]
Underscoring all these factors are the continued political uncertainty and resultant negative effects of transitional state of affairs. Economics in the transition is mind boggling and the financial sector is one more casualty.
However, I won’t go to the extent of calling it a “bubble waiting to burst.” Lessons have been learnt and I expect the banking community to behave much more responsibly in the days to come. Regulators have responded too, with directives requiring financial institutions to pay more attention to critical aspects like liquidity, governance, etc.
Let’s not forget that there are quite a few financial institutions that are fundamentally very strong – strong enough to effectively lead the sector out of the current challenges. It’s possible that the banking landscape will change a bit in the next two years – through mergers, realignments, and improved banking regulations.
But the fact of the matter is that the banking sector continues to be the most transparent, the best performing and a well-regulated industry in our economy, relatively speaking, and is capable of emerging out of short-term cyclical downturns.
I’m a 34-year-old professional enjoying a reasonable career growth. I have some spare money right now which I think I should invest for my future. Should I invest in gold? I don’t see too many safe investment opportunities around here.
Undoubtedly, investing in gold has been profitable over the last few years. It’s been in the best performing asset class during last five years or so. Last year alone gold appreciated by around 40%.
However, please bear in mind that even gold can move downwards or sideways for a long period of time. We saw this happen during much of the 1980s and ’90s. There’s no guarantee that last year’s spectacular performance will be sustained, particularly at this juncture when the global markets are utterly confused and erratic with gloomy pictures of the western economies.
These days, analysts the world over find it difficult to confidently predict how currencies, commodities and stock markets will move. A friend of mine bought some silver a couple of months ago at a strong advice of a colleague who was of the view that silver prices could only go up as the stock was depleting globally, and silver being a key input for the Scud missiles. However, the price dropped by more than 10% in US Dollar terms a week after he bought. Luckily for him, its value in Nepali Rupees hasn’t suffered much, as our currency has devalued quite sharply against the Dollar.
The basic approach to investing in precious metal like gold and silver should be to diversify your portfolio to reduce risks, not to earn quick spectacular returns. Avoid your temptation and invest only five to 10% of your portfolio gradually over a period of time.
Nepal’s stock market has unfortunately been limp for sometime now. But prices are relatively low; therefore, attractive from the buying perspective. If you believe in the country and have a longer term perspective, it may be worthwhile allocating another 10-15% of your portfolio in the stock market. However, please do choose your companies wisely and make sure that they are fundamentally strong.
Why don’t banks in Nepal lend without collateral? Aren’t they in the business of lending money?
Banks are financial intermediaries. Unlike conventional moneylenders, banks raise money from depositors for investment and lending purposes. It’s important for banks to be able to return their depositors’ money, with interest as applicable, at all times. Banking system is built on the trust and the confidence that the money you deposit with a bank is safe. And because the money you borrow from banks essentially belongs to somebody else, they need to be extra careful in satisfying themselves that you shall be able to pay back the loan you take.
A traditional moneylender, on the other hand, isn’t accountable to depositors because he’s using his own money.Banks study and analyze various information and data, including your past performance and income history, to assess your borrowing needs and repayment capacity. However, it’s often not possible for banks in Nepal to verify the accuracy of the information.
This is attributable to a general lack of transparency, excessive use of cash, and inability of the tax regime to encompass a significant portion of economic activities, among others. Inaccurate information increases perceived risks. Therefore, banks ask you to pledge your property as collateral to a) buy in a greater level of commitment from you, and b) to secure themselves in case you fail to repay the loan.
You should also know that Nepal Rastra Bank, the regulator of all banks in Nepal, encourages banks to lend against collateral security. In fact, it costs banks more if they lend without any collateral. Having said that, it’s not true, however, that banks in Nepal lend only against your property as collateral. If you have a good credit history, a track record of timely payments and your income sources transparent, verifiable, sufficient and sustainable, banks will consider lending you even without collateral. Businesses can also avail of loans against company assets only if the banks are happy with the risk.
Let me take this opportunity to reach out to today’s youth and ask you to demand better transparency, end of archaic tax regime and for ethical business practices. If you’re a salaried individual, ask for all of your remuneration to be paid through a banking channel. If you’re a business owner, keep your accounting books up to date and reflective of the actual position of your business.
Avoid transacting through cash to the maximum extent possible. I’m sure other stakeholders of the economy will reciprocate appropriately. Slowly but surely then, we’ll reach a stage where you may not need to pledge your property for a loan.
DISCLAIMER
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.
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