But by mid-2009, the realty sector was already overheating as every investor, big and small, was going for it and land prices in many places were doubling every six months. Banks were pouring money into real estate and housing like crazy, despite knowing that individual buyers were doing likewise just for speculative gain and there were very few end users, if at all. The banking sector was not just taking risks but also making imprudent investments – there wasn’t any intensive background checking of potential borrowers, nor was there rigorous assessment of borrowers’ cash-flow situations, a primary concern for any prudent lender.
Sipping his Scotch at a restaurant in the capital a few months ago, one of Nepal’s top bankers shared a story of how a CEO at a local bank made his investment decisions. According to the banker, one of Nepal’s biggest businessmen once bumped into him and asked if his bank could lend him 800 million rupees to buy up some acres of land in the capital. The businessman argued that if he could hold on to the land for just the next few months, it was going to accrue him millions in profit. “First, I wasn’t convinced by the proposal,” said the banker, “and even if I was, I had to be assured of his cash-flow situation before I agreed to lend.”
Distraught, the businessman dialed another banker right away and asked him if he could lend him the 800 million. The other banker responded that the amount was beyond his limit and promised to lend him 400 million instead. No background check; no analysis of cash-flow situation; no property valuation; no proper paperwork done, and yet the banker had promised to release the money within a few days. “This is how some banks lend money here; it’s simply a crime,” the first banker fumed.
He estimates some 300 billion rupees to have been trapped in the realty sector and says it’s too early to predict how much of it will be recovered by the banking sector. We will have to wait another six months or a year to see how severely this reckless investment in realty will hit the imprudent banks.
The realty bubble has subsided significantly, thanks to policy interventions by the central bank since December last year.
The lesson from housing and property bubbles and their eventual bust in Japan in the early 1990s and in the US in 2008 is that the market itself cannot check unsustainable growth in the realty sector. The assumed self-correcting ability of the capitalist system is no longer taken for granted.
Nepal Rastra Bank capped the banking sector’s investment in realty at 40 percent and it has further tightened the leash on investments going into real estate (mainly land transactions) through its latest monetary policy announced in July. The banks can now invest only up to 10 percent of their portfolio in this sector.
The central bank’s policies are working—land transactions in Kathmandu Valley declined by up to 75 percent compared to this time last year. And the trend is similar outside the Valley as well.
I and my wife missed the bus and failed to invest in land. Since there are hardly any other investment opportunities, we don’t know where to invest. But that’s besides the point. The main point here is, when the realty sector was allowed to boom at the cost of the rest of the economy, we, like everyone else, were tempted to invest in land in expectations of overnight returns.
The lesson from housing and property bubbles and their eventual bust in Japan in the early 1990s and in the US in 2008 is that the market itself cannot check unsustainable growth in the realty sector. The assumed self-correcting ability of the capitalist system is no longer taken for granted.
The role of the regulatory institutions is, therefore, crucial in a capitalist, free-market economy.
The whole idea of a capitalist system is to unleash individuals’ economic potential. In the absence of regulations and monitoring of the markets, greed quickly replaces entrepreneurial spirit.
Take, for instance, the case of the five cement factories which were recently banned in Nepal by the Nepal Bureau of Standards and Metrology for producing and selling low-quality cement.
These cement manufacturers thought that they could sell inferior cement, make a quick profit and still get around the law. As they assumed that they could circumvent the regulatory bodies, their entrepreneurial spirit was quickly replaced by outright greed.
A free-market economy without regulation and monitoring is as hopeless as democracy without accountability and transparency.
Sadly, neither are our markets well-monitored nor are our politicians accountable, and that is at the center of the crisis in our politico-economic system.
When ordinary men and women feel that their interests are not taken care of by the market and by democracy; or worse, when they feel cheated by the system, they will gradually lose patience and seek an alternative system.
The frustration of ordinary men and women is hardly unjustified—after all, they are not the ones who distort the market or abuse democracy. Where do they get the access and influence for doing so? Aren’t they, instead, just passive onlookers?
It’s the political and professional classes (include businessmen, civil society and the media in this) that should share the blame for the dysfunctional system that we have created, and we must also take on the responsibility for changing it.
ameetdhakal@gmail.com
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