A team from the International Monetary Fund (IMF) recently visited Kathmandu reportedly to study the economic performance to negotiate a loan with the government under the Poverty Reduction Growth Facility. At a press conference organized on November 23, 2008, the team, led by the Deputy Chief of Asia and Pacific Division, made a few remarks about the Nepali economy that were in line with the observations made by the economists and media here. Some of these were: (a) the government budget is ‘ambitious’ and, if it failed, ‘ macro economic stability might be threatened’; (b) the global recession will not affect Nepal in the short run; (c) Nepal’s inflation rate, given the fixed exchange rate with the Indian currency, could well be called ‘imported’; (d) proliferation of deposit taking institutions in the country is providing a tough challenge; and (e) the banks have over-exposed themselves in the real estate market. In the view of IMF, the biggest short-run concern is rapidly growing real estate price which is partly caused by loose monetary policy. The mission’s recommendation was, therefore, to tighten the monetary policy to prevent risks of the growing exposure of the banks and financial institutions to real estate.

The total outstanding loan of the commercial banks in the real estate sector almost doubled in a year, that is, from Rs. 22. 6 billion in September, 2007 to Rs. 45.5 billion in 2008. Still, it accounts for just 13.9 percent of total outstanding loans of the commercial banks. It is, therefore, legitimate for some to claim that the lending activities of the banks in the real estate sector are on the manageable level. Some of them are even opposing the policy recommendations of the IMF which, in my view, are not inappropriate but for different reasons. We have to analyse the problems from different perspectives.

The Nepal Rastra Bank has tried to follow, in the recent past, relatively tight monetary policy. The further tightening of the domestic credit as recommended by the IMF cannot be challenged either. However, it may not serve the intended purpose of the IMF team as the problem is much structural. It cannot be influenced by the monetary policy measures, at least in the short run.

The commercial banks in Nepal are more interested in having appropriate security for providing the loan rather than the purpose of the loan. And as far as security is concerned, it depends on the wealth structure of the public which consists of land, buildings, and money; the role of bonds and shares in the wealth structure of the public is almost nil. Therefore, in September 2008, the commercial banks had provided loans of Rs. 194 billion, or about 60 percent of the total, against the security of land and buildings. This is about 25 percent of our gross domestic product in 2007/08, up from 20 percent a year earlier. There is no precise information of how this money was used and where.

The available information also suggests that the overall performances of the individual commercial banks and their concentration on loan against the security of house and land is negatively related. In January, 2008, for example, the Rastriya Banijya Bank provided almost 80 percent of its loan against the security of land and buildings, followed by Lumbini Bank (67.0 percent), Nepal Bangladesh Bank (65.3 percent) and Kumari Bank (65.3 percent), in that order. Nabil Bank has just 28.2 percent of its loan against the security of land and buildings, and so is the case of Standard Chartered Bank ( 37.6 percent).

Now, the question, especially for the problematic bank, is: Has the security been properly evaluated and appropriately priced? Unfortunately, we don’t have any official information. According to Surya Nath Upadhaya, former chief of the Commission for the Investigation of Abuse of Authority, it is not. In his view, there have been cases where excessive valuation of land has been done for loan purposes with the participation of bank officials. In a few cases, the land that was used for security purposes was either barren or of low quality. An official document that was made available to us shows that a commercial bank has provided a loan to an individual against the security of the stadium! Many other cases can be cited.

The problem in the financial sector is more serious than indicated by IMF. It needs serious attention of the government. On the contrary, a strange deal was made between the Maoists and the Nepal Communist Party (UML). According to Surendra Panday, chief of the Parliamentary Department of the UML, in the recent election for the vice- chairman of the Constituent Assembly, they supported the Maoist candidate with the understanding that the UML would appoint its worker to the post of the Governor. The top post of the monetary sector was exchanged for the second important post of the Constituent Assembly. Period. What else do we need to solve the financial crisis? Or, is it the beginning of the financial crisis?

Dr Pant is executive director, Institute for Development Studies