The pre-Dashain currency note shortage a couple of years ago did disappoint many of us, given the demand for new notes for the festival. In my view, the shortage can be attributed to administrative gap triggered perhaps by leadership vacuum prevalent back then at the Central Bank. The issue has now been resolved, lesson learnt, and I don’t believe such an incident will recur.
Irregularities and scams have dogged every sector of our economy in recent times, which perhaps is a result of the prolonged political transition. There are no excuses for inefficiency, failure to uphold the rule of law, disrespect for professionalism, or plain dishonesty.
On the other hand, there are numerous examples where the media have manufactured or exaggerated issues. Many professionals in various walks of life have been presented in bad light for no fault of theirs. Genuinely clean, capable executives are frustrated as their good deeds are often penalized.
But let’s take a step back and reflect. They say you get the democracy you deserve. It looks like we’re suffering because of the silence of good people. Democracy is actually an impediment to progress if you don’t have the maturity to benefit from it. Let’s just hope and pray that good sense will prevail, and we’re able to build an atmosphere where excellence is respected.
Having said all that, let me assure you that banking continues to be the most transparent sector of our economy. You can receive adequate information that will help you differentiate a good bank from a bad one.
Placing excessive premium on the upside gain (from high interest rates) and not paying enough attention to the downside risks (associated with poorly managed institutions) can jeopardize your lifetime savings. Therefore, you need to do some homework and be discriminating in choosing a bank. And there are many strong banking institutions out there.
Keeping your money overseas isn’t an option unless you’re living and working in a foreign country, as the foreign exchange regulation generally prohibits Nepali nationals from doing so. Storing your money in your safes at home can never be a good idea. Not only will your money stay unproductive, it’s far more risky. And you may also be encouraging unofficial economy to grow, which brings us back to square one.
It appears that banks are stuck with huge real estate loans which haven’t been repaid. How will it impact the banking sector? Should I be worried as a bank customer?
First, let me quickly summarize the scenario in Nepal. Commercial banks account for about 80% of banking business. As per published financial reports, less than 15% of their loans are to the real estate sector, as defined by the Central Bank, which, I believe, is fairly broad-based. My estimate is that about a third of this portfolio is at risk, which means, banks may need to provide for upto 5% of their loan books if the situation doesn’t improve.
All economies go through cycles. In a downturn, the increase in NPA (non-performing asset) levels to 5-6% is not uncommon, and certainly not unmanageable. A few of our banks have already been there and back in the past.
These loans are backed by tangible properties whose value will not diminish to zero. So, whilst it may be somewhat painful in the short term, it’s a matter of time before banks recover their money. In some ways, the current difficulties are perhaps necessary to bring about much needed corrections in the market. Moreover, the issue appears to be receiving attention of the government authorities, and measures to limit the damage can be expected.
Please don’t be overly concerned as a bank customer. NPA levels will rise but it won’t be a runaway for most banks. Historically speaking, more banks have folded on account of liquidity problems, not due to bad loans. Fundamentally strong banks will weather the turbulence associated with asset quality effectively and emerge even stronger. But the onus of choosing the right bank lies on you.
As an owner/manager of a small business that supplies various items to large companies, how can I minimize my financial costs? My buyers are delaying their payments, citing depressed market conditions and I’m borrowing from private parties to meet my working capital.
First and foremost, please talk to a bank and have a line of credit established. Bank debt is usually far cheaper than private borrowing. Besides, most banks these days are keen to lend to small businesses and will offer assistance with your accounting statements, etc. A bank can also be a good partner for business growth.
Experienced Nepali bankers will tell you innumerable stories of having helped small businesses grow. A majority of large companies in Nepal today started small and were able to grow with a little help from banks, among others.
Secondly, do consider getting your trade receivables discounted by a bank. Simply put, it’s a way of collecting money owed to you by large companies immediately without taking away the credit period extended to your buyers. Here’s how: the invoice you raise against your supplies needs to be accepted by your buyer, signifying their acknowledgement and undertaking to pay at the end of the credit period.
This acceptance can then be “sold” to a bank which will pay you immediately and collect the money from your buyer on due date. A fee will be charged to you to compensate for the bank’s funding costs but it usually works out cheaper than a loan. The only prerequisite is that the bank should be willing to take a risk on your buyer.
Since your buyer is a large company, chances are they are well known with good market standing, and banks will therefore have an appetite to risk their money on them. Do check with your bank if they entertain such a transaction. A smart bank will.
Joshi is the ceo of Laxmi Bank.
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 refarain 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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