Real estate poses systemic risk

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Ashoke SJB Rana is the chief executive officer of Himalayan Bank Limited. Himalayan Bank, one of the oldest private sector banks in the country, is celebrating its 19th anniversary this week. The Kathmandu Post talked with Rana about the bank’s achievements over the period and challenges facing the banking sector. Experts:

Himalayan Bank is celebrating its 19th anniversary this week. What are the achievements of the bank over the period?
We have been providing 30-40 percent dividends to our shareholders every year. We provided 11 percent cash dividend and 25 percent bonus shares in fiscal year 2009-10. We are pioneer in introducing credit cards and SMS banking in Nepal. We have invested heavily in world class technologies to ensure our customers’ easy access to banking service. We invested in people (human resources), process (accessibility) and technology. We invest more than 6 million for training of human resources every year.

We have one of the biggest depositors’ bases with active account of more than 200,000. We are one of the banks having biggest corporate clients. However, for the last three years, we are focusing on small and medium enterprises (SMEs). While lending to SMEs, we are also training them on maintaining accounts. We have currently 15 percent loan portfolio in SME sector and we plan to increase it to 25 percent within 2012.

Liquidity crunch has continued this year too. How will it affect banks’ profit?

Banks are facing accute liquidity pressure as deposits have not gone up. It is reflected by the over 12 percent interest rate on inter-bank lending. About half of the amount of total deposits of commercial banks has been stuck in the realty sector. We hope that the situation will ease after the government expenditure picks up momentum. The government recently issued bonds worth 4 billion and this also contributed to the exit of deposits from banks. In case of HBL, our profit has gone up by 17 percent over the last six months. This was possible after we recovered bad loans.

How risky is the real estate sector, given that the sector is facing recession?
Those banks having huge lending to real estate may face difficulties in recovering loans by April. Banks have invested around Rs 124 billion in the realty sector. On the other hand, banks’ investments of around Rs 6 billion in crusher industries are also at risk due to government’s ban on the export of sand and boulders. Real estate and crusher industries pose systemic risk.

Banks have started increasing lending rate after the Nepal Rastra Bank issued guidelines on service charge. How is HBL reacting?
We also had to increase the interest rate on lending, as our cost went up by Rs 130 million while adjusting interest rates on saving accounts. We have now offered 5 percent interest on general saving accounts and 7 percent on special ones. We had to increase interest rates on general saving accounts by 1.25 percent. That’s why interest rate on trust recipient loans went up to 12 percent in January 2011 from 11.5 percent in December.

Do you see any possibilities of bank mergers in 2011?
Mergers and acquisitions are new areas for the banking sector. The biggest hurdle is the promoters’ share. Promoters should be ready to go for merger if their shares are valued equal to public shares. There should not be division between promoters’ shares and public shares after the locking period of five years. Finance Secretary had once assured that the government would reduce the corporate tax for banks to 25 percent from existing 30 percent if they go for merger. The budget for the current fiscal year could not incorporate such provision. If the government and NRB give some incentives for merger, it will encourage mergers. Merger is not an easy task. Management of employees will be a tough challenge because the staff leaving the merged bank should be compensated.

Nepal Rastra Bank is preparing for the mid-term review of the monitory policy. In your point of view, what are the issues that the central bank should address while reviewing?
The NRB imposed cap on real estate sector. The government has discouraged the import of gold due to deficit in balance of payment. Now, people have little investment options. In this situation, if the central bank provides some relaxation in the capital market, people can have an area to invest in. The NRB can exempt the provision that investors should pay 25 percent of the loan taken for purchasing shares while renewing such loans. Banks, which are curresntly facing liquidity crunch, may feel some relief if the central bank reduced the cash reserve ratio and decides to deposit government’s resources in commercial banks.

source: The Kathmandu Post: Money(2011),"Real estate poses systemic risk",The Kathmandu Post, 19 Jan 2011, p.3

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