"Restoring calmness in real estate sector was former governor's biggest feat"

In 2009, the real estate market was on fire due to easy availability of credit from banks and financial institutions. The runaway rise in real estate prices, particularly land, in turn, was creating price bubbles, posing threats not only to the financial sector but the entire economy.

The most worrying factor at that time was that many, who had invested money in land, did not know what they were doing. They were simply following the herd and pouring in more money, anticipating sharp hike in land prices in the next few days, weeks or months.As speculative investments began to grow, Nepal Rastra Bank (NRB), on December 17, 2009, made a landmark decision to curb lending to the real estate sector.

Issuing a directive, it instructed all banks and financial institutions to bring down their real estate credit exposure to 15 per cent of the total lending by mid-July, 2011 and 10 per cent by mid-July, 2012. Also, instruction was issued to bring down real estate cum residential housing credit exposure to 30 per cent of the credit portfolio by mid-July, 2011 and 25 per cent by mid-July, 2012.

To further curb flow of easy credit, the central bank also instructed banking institutions to put a 60 per cent cap on loans issued against real estate. This barred borrowers from obtaining credit in excess of 60 per cent of the market value of the real estate pawned as collateral. These measures were taken when Bijay Nath Bhattarai was at the helm of NRB. But three months after issuing these directives, Bhattarai retired. And on March 19, 2010, Yubaraj Khatiwada was appointed as NRB’s new governor.

Many wondered how Khatiwada would respond to the crisis-in-the-making and whether he would be able to avoid a crash.At that time, memories of how advanced economies, including the US, had plunged into severe recession largely due to crash of the housing market were still fresh in many people’s mind. And they did not want repetition of the same here.

But Khatiwada surprised many. He not only gave continuity to initiatives taken by Bhattarai but made sure directives issued by NRB were implemented by banks and financial institutions.

This created panic in the market, as many feared funding for ongoing real estate projects would significantly taper. To restore calmness, the central bank said the new set of instructions would not apply to loans which were sanctioned prior to issuance of the directive.

Because of this provision, lending to real estate sector continued growing and topped Rs 98.96 billion — almost 20 per cent of the total lending of commercial banks — by mid-January, 2011.

At that time, DCBL, now known as Grand Bank, had the highest exposure to the real estate sector. The bank had extended 32 per cent of total loans to the sector. Banks like Kumari, KIST, Sunrise, Prime, Citizens, Laxmi and NCC had also extended over 25 per cent of their total loans to the realty sector.

This kind of exposure generated fears of massive loan defaults, as real estate prices had gradually started to fall. Had those fears turned into reality, crisis in the real estate market could have spilled over to the

financial sector and the real economy.

But that did not happen. And as Khatiwada walked out of NRB today, after completing a five-year tenure, calmness has been restored in the real estate sector. “This was the biggest achievement of Khatiwada and no one can dispute about it,” Lumbini Bank CEO Shovan Dev Pant told The Himalayan Times.

Khatiwada then gradually started enhancing risk management systems so that banking institutions could take risks knowingly and reduce risks where appropriate.

This led to introduction of risk-based supervision of banks and financial institutions, on top of compliance-based supervision. This meant supervision would not solely be based on compliance of financial parameters, like capital adequacy ratio, among others. In other words, commercial and development banks had to perform other activities as well, such as stress test, under which institutions have to see whether they can absorb shocks that emanate from massive credit defaults and sudden withdrawal of huge deposits.This measure serves the interest of depositors, who park hard-earned money in banking institutions, and holds back financial risks from building up in the country’s banking system.

To further strengthen banking institutions, Khatiwada also introduced guidelines for merger and acquisition. These regulations allowed banks and financial institutions to strengthen their capital base and consolidate their position in the market.But these measures alone do not make banking institutions full-proof.

In the past, many banking institutions had failed because of vested interest of promoters. To control this, Khatiwada introduced a directive that barred bankers from assuming dual role of chairman and CEO in the same institution. He also barred more than one member of the same family, firm or group from assuming positions in the board of the same institution.Because of his practice of governing the banking sector largely through directives, Khatiwada remained a controversial figure till his last day in office.

Many bankers say he could have solved many problems through dialogue. But instead he issued one directive after another. This showed there was trust deficit between the governor and bankers, as a result of which gap between banking institutions and the central bank continued to widen.In the latter days of this five-year term, Khatiwada was also charged of coming up with directives without thinking of consequences.

Few months ago, NRB came up with a controversial directive that made it mandatory for commercial and development banks to make remittance payment through bank accounts, but allowed remittance companies to make direct cash payments. This, bankers said, created an uneven playing field for banks. Later, NRB was forced to back down and make necessary amendments.

Had the central bank discussed this issue properly with bankers, it probably would not have been blamed of showing prejudiced behaviour. Despite these setbacks, Khatiwada, a PhD degree holder in monetary economics, did a commendable job in maintaining financial stability. The new governor should give continuity to what Khatiwada did, introduce better policies for development of the financial sector and work in partnership with banks and financial institutions to create synergy.

source:the himalayan times,20 March 2015