Nepal heads towards financial crash

Liquidity Crisis Another FI seeks succour

The Kathmnadu Post

Another financial institution (FI) has approached Nepal Rastra Bank (NRB) for liquidity injection. Gripped by acute liquidity shortage, Vibor Development Bank (VDB) on Wednesday sought succour from NRB and Nepal Bankers Association (NBA).

After Nepal Rastra Bank pulled out its fixed deposit of Rs 260 million followed by Nepal Army's Rs 50 million, Vibor dived into acute liquidity shortage. Nepal Army had taken loans about Rs 50 million against its deposit in the bank.

With two financial institutions asking for liquidity in two days, there are fears in the financial sector the situation could drag down other other financial institutions. "The government must step in," said a leading banker. "It should announce immediate measures to control the situation."

Ajay Ghimire, chief executive officer of VDB, admitted that his bank had approached NRB and NBA for liquidity management. During talks with NBA on Wednesday, bankers urged VDB to let NRB take over its management until its liquidity situation stabilises.

 "All banks showed reluctance to provide inter-banking loans and suggested VDB allow management takeover," said a banker who attended the meeting. "Bankers were uncomfortable to provide VDB inter-bank loan as it didn't have enough security instruments like treasury bills and bonds."

Despite good credit to deposit ratio of 58.09 percent, the bank has struggled to manage liquidity. According to Ghimire, the problem at Vibor is purely a liquidity one, not systemic risk. "We've asked the central bank to ease the liquidity problem," said Ghimire. 

As of Q3 of the current fiscal year, its non-performing loan has gone up to 8.42 percent from 0.42 percent during the same period last year. The bank has been incurring net loss of Rs 88.44 million as of its third quarterly report. The bank said it is due to recovery problems in some loans, especially slow recovery in realty and housing sector. According to the banker, Vibor had asked for liquidity around Rs 200 million through interbank lending. The central bank was undecided until Wednesday how to bail it out. NRB has called a board meeting on Thursday.

NRB Deputy Governor Gopal Kafle said the central bank hasn't thought of taking control of the bank. "Any decision on the bank would be taken by the central bank's board meeting on Thursday," said Kafle. The central bank could opt for refinancing measure instead of takeover.

NRB had earlier provided refinancing facility of Rs 190 million to the bank. According to Ghimire, the bank was struggling to manage liquidity position for few weeks and had taken refinancing facility from the central bank. "After the Nepal Share Market episode, we'd taken refinancing facility from the central bank and were in recovery mode," said Ghimire. "However, there was pressure on deposit withdrawal from Monday with People's Finance closing down its transaction due to liquidity shortage."

Bankers say it is time the government set up confidence building measures. According to them, a series of government decisions at the same time heightened problems in the banking sector. "Neither the government nor NRB sees the gravity of the problem," said a banker. "The decision to withdraw  Rs 500/Rs 1000 notes bearing the former king's likeness, income disclosure provision, issuance of bond by the government despite enough cash in the treasury has worsened the situation." (From TKP)