Finance companies face liquidity crunch; deposits fall 4%
KATHMANDU, May 9: The deposits of finance companies shrunk by over four percent in the first eight months of the current financial year as depositors lost confidence in category ´C´ financial institutions due to emerging cases about their financial imprudence and bad governance.
In the eight months through mid-March, deposits of finance companies stood at Rs 81.53 billion - down from Rs 85.47 billion reported during the same period last fiscal year. This dismal performance is reported at a time when the banking system is flush with liquidity.
“The deposit collection has been falling this fiscal year as people lost trust in finance companies after couple of them were declared troubled by the central bank,” Rajendra Man Shakya, president of Nepal Finance Companies Association, said, referring to Capital Merchant Banking and Finance, Nepal Share Markets and Finance, and People´s Finance that faced action of Nepal Rastra Bank (NRB).
The central bank had taken action against them after they generated holes in their balance sheets due to bad governance and overexposure to bad loans.
One of the biggest pull factors of finance companies has always been high interest rates, which still range from 8 percent to around 16 percent.
“But after cases related to involvement of promoters in embezzlement of funds came to light, many depositors started keeping such institutions at distance and moved funds to commercial and development banks despite knowing their yields are lower. This was done mainly to ensure safety of funds,” a senior NRB official said on condition of anonymity.
Many of the clients who decided to change board included institutional depositors like insurance companies, Nepal Army, Nepal Electricity Authority, Employees Provident Fund and Nepal Telecom, among others, whose deposits used to make up more than 40 percent of total deposits of finance companies.
“So far, a significant chunk of these institutional depositors have fully removed their funds from finance companies. Those that have retained their accounts have also shifted up to 50 percent of their funds to commercial or development banks,” Shakya said, citing this as one of the biggest problems faced by finance companies.
He couldn´t say how the situation could improve as his own Capital Merchant Banking and Finance had recently gotten into trouble. “But it surely will take some time as it takes time to build reputation,” Shakya said.
Statistics of the central bank shows that financial condition of most of the ´troubled´ finance companies had deteriorated at a rampant pace.
For instance, non-performing loan of Nepal Share Market and Finance, which stood at 1.59 percent of the total credit portfolio till July 2009, had surged to 56.98 percent by May last year. Likewise, Samjhana Finance, which had carried zero bad debts in July 2009 and was ranked No. 1 by the central bank in its report, was facing liquidation in less than two years after the report was published. It was the same with Capital Merchant Banking, whose non-performing loans stood at 2.69 percent in July 2009 but soared to 21.04 percent by April 2011.
“This shows many financial companies do not maintain fiscal prudence,” the NRB official said. “If they do not act fast they will continue to lose clients.”