An International Monetary Fund (IMF) mission has been to Nepal recently on nearly a two-week visit. It expressed concern over soaring real estate prices in the Kathmandu Valley. The IMF delegation called for a tighter monetary policy, because, according to it, a looser one has contributed to real estate boom. It said a crash in the real estate prices would affect the banks and the economy at large. Experts have indeed been wondering for the past several years about the rapid growth of financial institutions vis-à-vis a sluggish national economy. The monetary policy unveiled by the Nepal Rastra Bank (NRB) recently has warned the banks and other financial institutions to cut lending in real estate. The IMF mission has also been of the view that the Nepali economy is ‘not risk-free’ and that it may be difficult to achieve the projected economic growth.

This year, the Nepali economy is also bound to feel the pinch of the global economic recession, because in an interconnected world, Nepal cannot remain an island. The impact will manifest itself in various forms. The government’s economic targets and objectives are likely to be affected as a result. However, the mission found the overall state of the economy

‘satisfactory’. Even neighbouring China and India are increasingly feeling the heat from the global financial meltdown. In Nepal, the risks that its burgeoning financial sector may face should also alert the stakeholders and the authorities concerned. Millions of depositors who have put their money into dozens of financial institutions are running a high risk. Indeed, America is now suffering from its financial institutions’ over-investment in real estate. According to the latest statistics, about half the loans of the Nepali commercial banks have gone into real estate, in the order of Rs.150 billion. And, overall, about two-thirds of the banks’ investment has flowed into sectors considered to offer ‘greater risk’. It is reported that during the last fiscal year, real estate transactions in the Kathmandu Valley totalled Rs.80 billion.

Moreover, it has come to light that several commercial banks have invested billions of rupees abroad — in deposits, bonds and shares. The prices of bonds and shares have been going down, and the capital market has not presented a very rosy picture. It has also been reported that a number of borrowers from Nepali banks have invested abroad, because, for instance, it carries a greater interest rate there. As IMF delegation said, several banks have become most vulnerable as a result. At a time when many dozens of development banks, and finance companies, as well as over two-dozen commercial banks, are in operation, the central bank will face an increasingly daunting task of monitoring and supervising them. Even in the past when the numbers of financial institutions were much fewer, NRB had not been effective at its regulatory function. However, it is somewhat reassuring to hear NRB acting governor Krishna Bahadur Manandhar saying that NRB will continue to tighten its policy towards bank lending in high-risk sectors. What NRB can do now is control damage and discourage unwise future loans. But

the possible fallout of unsound past decisions is beyond its control.