Averting banking crisis

The urgency that Nepal Rastra Bank (NRB) demonstrated in dealing with the liquidity crisis at Vibor Bikas Bank was praiseworthy. In a sign of its responsiveness, an emergency meeting of the central bank decided to provide loans of Rs 500 million under the lender of last resort provision and even released the money by afternoon of the same day. This breathed new life into the troubled national-level development bank. More than that, it prevented possible escalation of negative public sentiment against the banking system, which recorded a sharp decline in depositor confidence.



The root of the problem is the protracted liquidity crunch the banking industry has been facing since last year following the realty bubble bust. Though almost all banks and financial institutions have found the going bumpy after that crash, it is the financial institutions with excessive exposure or direct investment in real estate that are in dire straits. The resulting financial crisis that has overtaken five financial institutions within just the last three months raises an obvious question: how save are deposits in banks and financial institutions?



Clearly, the present situation calls for greater caution and preparedness on the part of the central bank and the government. It is good that NRB, a day before it opened up additional refinancing for financial institutions, also raised the volume of loans that they are entitled to from the central bank against the pledge of good loans as collateral. Though refinancing policy has helped to ease liquidity in the system, we believe there should be a time-bound liquidity management plan to foreshorten any dependency on central bank financing.



The central bank should also review for the time being the policy on withdrawal of deposits, as it was withdrawals that triggered the latest banking crisis. The government should also expedite spending of the development budget locked up in the treasury.



We urge financial institutions to play a more responsible and mature role at this juncture and refrain from doing anything that will raise a hue and cry in the market. No one knows better than they do about institution-specific problems. In this regard, we urge them to move toward lesser dependency on institutional depositors and refocus their energies on luring individual depositors. They must also do away with executive chairpersonships to ensure better checks and balance at top level management.



They must likewise stop all forms of irregularities and get their books back in order. Financial institutions should at the same time look seriously into the possibility of mergers if they are to acquire new capital strength. These corrections are vital for the survival of the financial system. Without them, remedial efforts by NRB and the government alone will not help.

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