Nepali Times
SANJIB SUBBA
Comment
Eight reasons why


SANJIB SUBBA


When government decided to open the licensing of banks and financial institutions (FI) of every shape and size, it was in line with its policy to liberalise the economy so the free market fundamentals would set the rules.

The mushrooming of banks coincided with the ten-year conflict, mass out-migration, closing of factories and a slump in investment. Money is liquid and needs to flow constantly. Liquidity explores opportunities in the economy, and in Nepal it flowed into the real estate sector. The price bubble meant that even overseas Nepalis sold their Kathmandu property to buy in the US. Brokers to bureaucrats, butchers to bankers- all became tycoons overnight, .

When the Nepal Rastra Bank woke up and decided to drive monetary policy into corrective mode followed by consolidation, it meant there was less money in the system. This triggered a liquidity crunch, which is what we are in at present. Many investors with real estate holdings were caught off guard and suddenly found there were no buyers because they were cut off from cheap and easy financing.

The worst is yet to come.

In the past few months, this is what has happened to the FIs:

1) Poor portfolio management. The use of short term deposits to fund long term loans was a mismatch and poor asset liability management. To maintain their credit deposit and other statutory ratios the drive to attract more deposits led them to offer higher interest rates which then would increase cost of funds and the narrowing spread would prompt them to increase lending rates too. This would also mean interest on existing bank loans would get more expensive and hence high probability of borrowers not being able to repay already troubled loans.
2) Corporate governance. This is a core issue in many of B and C Class FIs. Conflict of interest issues are either ignored or not understood. FIs have not drawn the line between what belongs to the promoter/directors and what belongs to the banks. In some cases the Chairman of the Board and Chief Executive are the same person.
3) Greed. The desire to earn overnight dividends and bonus. Reasonable profit is fine, but the banking industry operates within certain parameters and a conservative approach ensures sustainability.
4) No innovation. Even though 70 per cent of Nepalis do not bank, there is little innovative thinking. The market is open for banking services, especially the informal sector.
5) Size matters. Innovation and investment is hampered by the small size of some FIs. Consolidation would help FIs so that they can take sound financial decisions and improve efficiency.
6) Weak monitoring. In the past there has been serious shortcoming in the part of regulators and governments. The numbers of FIs were allowed to grow haphazardly with out proper assessment.
7) Delayed action. How long can the regulators postpone action because of the fear of the unknown? Wrong doers must be booked and action taken as soon as possible. There have been bailouts and FIs have not been allowed to fail, which is fine as long as it doesn't send a wrong signal to stakeholders.
8) FIs forgot what prudent practice is: how would an FI place large deposits without addressing counter party risk with another FI?

Trust and confidence in the banking system seems to be evaporating, and restoring it should be a priority. Protecting wrong-doers will send the wrong message. The industry still has many competent institutions and professionals that can drive quick corrective measures to restore public confidence.

Sanjib Subba is the CEO of the National Banking Training Institute
www.nbti.com

Read also:
Budge on the budget, EDITORIAL
Reinstating the state, ANURAG ACHARYA
From Awesome to Awful, NGUTUP SHERPA



1. who cares
1) Poor portfolio management.

brilliant analysis, never came in my mind. 


2,3,4,5, 7, 8 

i agree.


6) there should not be restriction on opening new FI.


8) to solve problem 8-

there should be limit in accepting deposit. like FIs should only get to accept 10-20 times of their capital.





For me, the main reason behind the trouble in FIs is the incompetent managers (big mouth, over smart, no brain, no skill, no learning ability from others mistake- like from US, east asians property bubble burst), idiots promoters choosing incompetent managers, criminal minded promoters. 



solution- It is not possible to judge which person is a good manager or promoter. so all govt. NRB should/could do is kill those FIs who have lost 50-75% of their investment. and this also help to bring down unnecessary completion.


Let the best rule. and make them pay reasonable tax.




2. Sunil
Encourage more reputed multi national banks to bring in the know how, innovation, systems and the capital and to invest. There was a carteling at one point in time to discourage outside expertise. We don't have it here..The local know how and system is just not adequate. Our bankers are money lenders at its best.

3. Naresh
Sanjib,
you are doing well, I hope.
But for now, I'm also awestruck with this crisis.
During recessions, we policymakers have two options:
1. Renewed Fiscal Policy (Govt. Spending plus Taxation)
meaning the central bank can either suck up/print the money or tighten/loosen the belts of taxation rates.

2. Renewed Monetary Policy (Money Flow plus Interest Rates)
This specifically concerns cash flows and interest rates..the most viable option for now is smother the reckless lending, which needs to vector the flow of cash aptly so bubble is not created..as for interest rate is concern, Nepal threw the can into the  road already following the peg of 1.6 that doesn't allow  us our independent interest rates.
..........................
Am I wrong our tax policies are BCC (black carbon copy) of 15th century England? Our country is in the dearth of such progressive tax policies., so we policymakers must immediately install a new, transparent, easy yet progressive tax policies.
Saltwater or Freshwater?
We have seen beyond the wall... Chicago economics is a wrong prescription!!
We can't deregulate the market just in the belief that it's self-sustaining. We must strictly intervene the markets should time come when "rentiers" don't stop their usual "profit prognosis"

If you have any economics and finance related questions, contact me at nareshneupane@live.com


4. An Abstract Economist

Being an Austrian School Economist, I've serious qualms over what actually pushes market to the edge of slumps, stock crashes, liquidity traps, demand shock, supply shock, runaway inflations etc. Let's first be clear at the epicenter of economics lies finance. And, capital is the brain of finance while any form of cash flows is its heart.
So how can we be sure that printing or sucking up the money is a fiscal other than a monetary policy. One may have thought of such moves especially by centrally authorized body like government spending, like the US Govt. monetizing its debt by issuing the bond or the recent twosome quantitative easing (QEs I and II) that the Federal reserve executed. But, it actually yielded anything other than the inflation running amok, well above some 3% and core inflation also near 2% which means the nest similar move can implode American capitalism at collapse. Basically, so to print money is both fiscal as well as monetary policy.

Nepal's fiscal order is beginning to show the signs of modern market trends but it's still incipient.  So to hope that doing something close to printing money which we can't do independently isn't a solution at all. In fact, only the US Fed is capable of such independence, not even advanced nations like Japan, Germany, France etc.
Next, whether interest rate is fully stitched to the peg of Nepali currency to the Indian currency is still a premature not only in theory but also in practice. First, the mobility of investors as has been ballyhooed isn't corresponded by our recent experiences. Private sector in Nepal, (which in turn borrows from the higher order of banks, and finally all banks sluicing money from central bank), charges exorbitant interest rates, meaning no substantial piece of Indian investors care to borrow from Nepal, and especially so due to risks associated with liquidity, credit, market, etc. 

Lastly, I also don't buy saltwater and freshwater economics as the viable economic options. Chicago economics is notorious, for it espouses the market as self-sufficient which has been sheer stupidity in economic science. Government just watching the flames of market slumps isethically to be an ignoramus. Nor do Keynesian approach like govt. spending in times of crisis seem to have solutions to '70s problem in the United States that was marked with stagflation. 
Austrian economics is only the best-suited economic option.


5. Naresh
Austrian School is a deficient economic prescription basically in two ways: Firstly, it idealizes cash flows, and the resulting market trends, as the result of Government sponsered Central Banks which seems plausible but misleading. In fact, the idea of money isn't that the more you pump it in the market will necesarily inflate the capital. It does but for economy in billions and trillions, small money pumped is comparatively offset by varying degree of money demand. This inflation malaise is particularly tied with its vision that Gold standard is the only option bound against any capital; secondly, its understanding that economics is basically psychological and we can't cure any economic, financial or business trends based on tallies is not just simplistic, but also ruinous. Being arithmetic and metrics of 'dismal science', not a single economic indicator, equation or graph may hit the bull's eye, nonetheless it can approximate the policy choices heedful and expedient. Either way, we can't stop inculcating statistics and calculus that are mostly correct if theories are pragmatic and justified.
  
Here, printing money, taken in the form of govt spending, is clearly the fiscal policy. It is well evident that many fiscal measures are interchangeable in terms of moneteray moves, which is natural taken both involve the capital flows. However, quantitative easing in the US which came to saved the recession beginning 2008, preceded by housing bubble, from drifting to the severe conditions like those of Great Depression, should be considered in that a smothering catastrophic was prevented.

The core inflation of about  1.5% is still the prerequisite for healthy economy. The Keynesian failure attributed during the period of stagflation was distorted by Chicago economists. Keynes was not fully right, but he had already intimated in his General Theory, 1937 classic about such scenarios. In fact, the 1970s saw in the USA when the short term measures compromised long terms econmic ruins. 

Obama has already sigalled he'd profer another series of QE (III) should the current levelof 9.1% unemployment remains persistent. He understnads very well  how much congress passed monetary supply saved many firms, which in turn, brought high employment back to mild levels. We should be mindful that what plagues Amrican Capitalism ain't anything the Govt. constraints but the lack of transparency, and Republican't stiff opposition to regulation and progressive taxation. 

In fact, Nepal can show such signal through national securities. I mean such securitization can take any forms so as to flip the financial contagion to safe sides.

The blatant lie is that Nepal has ever showed such independent borrowing from Indian investors since that inevitibly leads to fatal crisis ahead of our country. In this interconnected world when investing,  borrowing and saving have shown unheard of levels of proximity, links, and resilience, the current situation here in Nepal behooves us of caution that the pool of capital slides so easily.

That's said Keynesianism, especially in light of new interpretations, is the only economic salvation of today's world.




6. Economic Cassandra
Any liberal or conservative approaches to be etched in financial slate accordingly the terms and prejudiced principles, not  through consensus, rational thought and pragmatics, is just an ill economic prescription however bombastic such scholarship or school of thought may be.

7. Sanjib Subba
Thank you everyone for your interest and valuable comments on this article. 

We are not yet in the recession. The regular consumption seems to be moving forward mainly thanks to the remittance - yes some items such as auto and home loans has been hit hard mainly due to freeze on new loans that too mainly due to liquidity crunch as explained. 

Then casual/unofficial information we hear on the street how people are lining up to buy gold bar in underground market is another story giving the impression where general savings moving now. The recent news on ban of Indian 500 notes may have been the another park zone so they are being tightened. 

It may help on part of the regulators to award tax exemption on deposits - though - may be new concept for Nepal but worth a try  and also the frozen government spending should start soonest possible so money start flowing back in the system as what we are dealing mainly now is the liquidity crunch not a crisis. 


8. A neophyte
Now, we need many Sanjib Subbas, who have knack for financial cycles and economic policies, and the resulting outcomes. Personally, I find these types of finance related magnum opus stimulating than even Prachanda's speech out there in Tundikhel. We public must revere Sanjibs as they are policy wonks on whose ideas lies the fate of our country. It doesn't matter if he's sought after or not, or if he's perked higher. It does only matter his theses has been platform of economic analyses. 
I also thank Nepali Times for bringing such a non-partisan voice in its paper and web.
Hats off!!


9. MOIN
Indeed a very though provoking right. Yes it has a thred with the current and probable future scenario of Bangladesh.

Best regards,

MOIN


10. comrade prachande
Hey Naresh are you Arthur using a thesaurus generator? !!!???

Btw why so little verbose on this one? Are you a schizo or what?

 hahaha


11. An Abstract Economist
#Naresh
Here is Krugman blog to elucidate the misinterpretation of Reagen years. You are right that the Right in the USA, which basically serves the rich people and pukes the Reagenite years as the best years in American prosperity, is responsible for the slug-paced economic recovery that nation is undergoing now. 
But, apart from trickle-down demagoguery underpinned in conservative  polity, the real jeopardy started with the notions that free market are well, rational and regulated. What a nonsense!
However, consumer confidence, stock crashes and bankruptcies like falling dominoes in Spain, Greece, etc. pertains the important fact ruling that psychology of people under economic palms, if not so significant, is really considerable. Consumers are prone to traumatic spillovers, so are stock brokers. When they feel the liquidity crisis across the aisle, they want to withdraw their savings and turn the financial institutions bankrupt. At that moment, I also think I'm a little bit keynoaustrian economist, to call central bank to liquidize so the trust is back. 
Yes, a  doubter of economic exactitude and also believer in Keynometrics (mathematical keynesianism). 
However, how can you be so sure of the Say's law, Okun's law and charts regarding lower zero bound interest rates vs. unemployment with accuracy? Tell me who except Raju and Joseph were there to exact the hit, including die-hard Keynesians who feel they are Cassandras like in the Greek mythology. I've misgivings on Krugman's part that he better had become a novelist (as he says to be inspired by Foundation series) than a liberal propagandist.


12. Naresh
Undoubtedly, this vague science named Economics appertains the real effects of psychology in consumer behaviors, and many financial upsides  and upticks. Then no mathematics..just literature? Is that your answer?

You pretty well say Okun's law, Say's Law, and another to justify a kind of confidence fairy. It has been proved that no substantial economic change befalls just because we believe it'll hapen so. Does our GDP grows just because we believe so?!! 
First, Say's theory that demand crosses out by supply thus maintaining equilibrium, and that the market is virtually rational to justify a balance have already faced fiasco following numerous spirals in many economic compression, monetary dislocations and stock stagnations. However, even Okun's law that is empirically based has been closer in statistical terms. The Fed Chairman Bernanke says that emperical observation of Say has come to delineate the relationship between GDP, unemployment, wage patterns and even, not the less, inflation, deflation and disinflation. Thus my assertion that Econometric is not a perfect science may come to you that nothing is beyond context, and exact, in deconstructionism.
But we have some vague assumptions and formulas to grab Nobel prizes.. 
A new economic deconstructionism we need...so to get a Nobel Prize.
Hahahahaha...:D :D :D



13. B2B
 How hard is it to striving to be our best selves and making the shift from being a consumer society to a productive one? If our wishes were horses, beggars will ride!

As it were, Mr. Subba's diagnosis of Nepal's dwindling state of economy is prescient, but it is only half done and not sufficient to cure a country's economic destiny alias a bed-ridden sick man whose remedies are in the hands of some of the few politicos/specialists who pass their time in playing a game of political brinkmanship.

Those amongst whom have some ideas of economics, they know certainly that a country's economic health is comparable to that of a human body. To have a sound economy the country alias human body must get the food full of vitamins, proteins, minerals et al regularly as country's finely honed and tuned in to new developments of budget orientation so that its commercial agents like legs and hands of human body could go outside the periphery to earn money or to negotiate commercial trade-offs by participating in bidding or else so as to enable them to feed the body or help the country be prosperous. The human brain works like the avatar of prime minister, the heart works as the financial and economic minister, rest of the organs like the ministers of industry,. communications, agriculture and so on. And the blood circulation is like the outflow and inflow exactly as exports and imports of cash alias blood in veins and arteries of human body. We are on the lookout for the next government to mend these crying shortcomings.

Apart from this case study of Nepal, I foresee a real tough time in the developed world because now folks have started carrying as a piggyback their telecommunications and computing power with them. These gizmos make an individual the most powerful by himself and slowly there would be no more need of creating enterprises, maybe a very few, as he could manage and monitor everything sitting idle in his living room right back at home.

So, where would it lie the real seat of power in future? As of now, I figure an individual as customer ain't a corporate entity, but a free mindset highly connected, but nonetheless an emotional human being who is empowered by this new situation where 90 percent of business decision-making is guided by emotional one. Still, business decisions say business to business (b2b) marketers remain focused on the old cliches of organizational psychology which definitely shall change in the course of time.

Which is why, we realize that work shall become no longer a place, but a state of mind.

All said, it shall take quite a slew of time to understand 'Work state of mind,' so as to reach out to some sudden spike of the state of emotions that provokes decision-making.

Judging by the context and content, erstwhile when the California Energy crisis brought deregulation, started under the Reagan Administration, to a screeching halt in 2000 AD, those elites started recommending deviation of cap on greenhouse gas emissions which would for sure be the catalyst for economic changes into ecologic ones by empowering the knowledge economy to create jobs massively. That predictable ship of change has yet to show up any old how.

Sometimes, the civilization comes and goes without making much stir, and hardly ruffles the folks in the third world.

That's what it takes to change the whole panoply of mindset while chips are down!?!



14. An Abstract Economist
Which is why, we realize that work shall become no longer a place, but a state of mind. -business to business (B2B)

..That's the 'absurd' inherent in every science. Had Einstein travelled to the next galaxy, nothing to say the entire web of universe, before discovering something about time travel, speed of light, finitude and the shape of the universe? Does light exist only in broad daylight here on earth when we get up at 5 because then the cock clucks and then comes the suryodaya, and ends with suryastha, never in the stars, or ...does time cease to exist in Mars even if we are yet to step that land?

So for any economist to know, or  to plan and execute market trends doesn't require to actually touch the commodity, ride the imports/exports, levy the custom duty, VAT or sales tax, etc, prepare a balance-sheet of every firms and meet the business delegations or attend the summit/s or conference/s and yada yada...

Which is why some people are hit brusque in their raw instincts, for they feel that knowledge exists in doing, not thinking. Whoa, who says knowledge is but actual performance than reckoning?

So B2B, CK Lal needs to examine every person, kowtow them, know their family history, and even call their spouses to write some phrases accorded to such persons, sometime to daub upon their names the spite and sometime to connote and sometime to sing the choirs of praises? Does Khagendra Sangraula incubate and hatch in a nest before writing a compelling case of liaison shared among two fellow birds, and finally rectifying the oritho-metaphor to himself?

 A writing is just a writing, with its own assortment of motivations, then only expression. A writer is first a writer herself, representing her ego or personality cult or else , and then only a contributor or other associations generally befriended and agreed upon in the academia/intelligentsia.
Not a single beginner can be denied any scope to write since s/he has not struggled, or s/he's still injudicious or s/he's till not succinct and all-encompassing in his style! yeah? Blame the popular gizmos for enabling someone who doesn't perform but thinks to excel. 

Never seen a single Nobel Prize winner actually doing else than thinking. Nor a single philosopher or historian! For it may include intuition, wit, imagination, wisdom, patience which are all compartments of minds.

Lovers whose lives are romanticized are mostly unable to write thrill fictions, poems or story but instead the person who loves her/his thinking.

Still unable to say what my heart sings..

P.S. So you write your statement by doing, not writing yeah!!?


15. Jomsome Thito
#14 Economist
What if 'thinking' is that 'doing'? What if doing is a deed, maybe visible or invisible, mental or physical, social or personal? What if case study of Nepal as well as comment on that case study, are both worthy deeds of gentleman, not of grown-up delinquents? What if deeds are not just for fellows in developed world, also for folks here in 'third world'? What if the remaking and the consequent designation of 'third world' also a deed, not only the analysis of its prospects?

It's still mystery you are an economist, not a philosopher other way around. 


LATEST ISSUE
638
(11 JAN 2013 - 17 JAN 2013)


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