Views of a Nepali Economist

On January 31, I wrote an opinion piece in Kathmandu Post with the title "Lessons in finance" (that is the KPost link. Link to my blog piece is here). I wrote:

...[the] number that the NRB and BFIs report as the contribution of the financial industry to our economic growth is false. The actual contribution is much less.

This misleading figure is the reason why we suffer through liquidity crises every now and then. In our recent liquidity crisis, the level of profit and savings that BFIs showed to their shareholders was distorted due to the above mentioned fudging of facts. They actually did not earn the profit that they claimed to have earned. 

My concern is that Nepal's financial industry is not doing as great as it projects in its balance sheets. They have been busy fudging numbers and facts to appear "healthy" so the shareholders remain "happy". I ended my article saying:

If the current trend of high risk-taking in the Nepali financial sector continues, soon there will be another liquidity crisis worse than the last one. The reason the Nepali financial market has not yet fully recovered from that crisis is that the same risk-taking behavior continues even today.

And, only a month later, today, the Kathmandu Post reports that there is now a "liquidity crisis" in progress, and banks are rushing to the Nepal Rastra Bank for cash. KPost writes:

A tight liquidity situation in the banking sector has prompted a number of banks to obtain standing liquidity facility (SLF) from the central bank for the first time in a year.

.........

“The first to obtain SLF was H&B Development Bank which has been hit hard by fraud committed by its employees,” said an NRB official. “Last week, Nabil Bank and the Bank of Asia also obtained the facility.”

As I mention in my opinion piece, the crisis that is now brewing is the result of poor management in our BFIs. But, do the BFIs care? No, they don't because however they screw up, the central bank is there to help them with "public" money from retirement funds, pension funds, etc. I will let the central bank's representative explain it:

“Although the government should not give the money meant for pension distribution immediately, we released the amount now to address the recent tightness in the liquidity situation,” said finance secretary Shanta Raj Subedi.

I have a phrase for that: moral hazard. As long as they face no punishment for their risky behavior, and instead get rescued by the hard-earned money of the public, the CEOs in our BFIs will continue to engage in risky behavior.

Labels: BFIs, liquidity crisis, nepal, NRB