Banks walking on thin ice: IMF warns of dangers of real estate investment

The International Monetary Fund (IMF) has asked Nepal Rastra Bank (NRB), the country's central bank, to tighten the monetary policy to prevent risks posed by the growing exposure of the financial sector to real estate.

Brian J. Aitken, deputy division chief of the IMF for Asia and Pacific, said at a press meet on Sunday that a decline in real estate prices would have a negative effect on banks and ultimately on output given their growing investment in the sector.

Aitken, who is also the chief of the visiting delegation to Nepal, said that some banks were really in a most vulnerable position. He, however, declined to name those banks. He said that the loose monetary policy was also responsible to some extent for fuelling the ongoing developments in the real estate market.

The IMF has also shown concern over the mushrooming banks and financial institutions licensed by NRB. "It is straining the supervisory soundness of the central bank," it said.

When asked if he thought that licenses should not be given to new banks and financial institutions, Aitken said that NRB needed more resources and manpower to supervise the growing number of financial institutions.

The IMF forecasted that the country's average inflation could increase to around 11 percent in the current fiscal year. Inflation had increased by 14.1 percent in mid-October this year against the corresponding period last year, according to NRB.

When asked about the likely impact of the global recession on the country, Aitken said Nepal need not worry as it was largely isolated from the global economy. He stressed the need to lead the ongoing peace process to a logical conclusion saying that it was critical for Nepal's economic development.

He said that the global recession could have an impact on the flow of remittances into Nepal due to job cuts in foreign countries. But he said Nepal' foreign currency reserves were at a satisfactory level. Aitken termed the recently approved government budget "ambitious"; and warned that if it failed, macro-economic stability might be threatened.

He was especially concerned about the "ambitious" revenue collection target. He, however, said that the goal could be met if progress continued at its current pace.

When asked whether Nepali officials had discussed the IMF's Poverty Reduction and Growth Facilities (PRGF) arrangement for Nepal, Aitken said that Finance Minister Dr. Baburam Bhattarai had asked his team to start a fresh one as the old one had expired. He, however, revealed that discussions were at a preliminary stage. He also expressed satisfaction over the finance minister's commitment to invite tenders for a management contract for two ailing government-owned banks -- Nepal Bank Ltd. and Rastriya Banijya Bank.

He said that the IMF supported the idea that the financial institutions should operate commercially.
Source:
Ekantipur