Another FI falls prey to bad governance: People’s Finance shuts shop due to liquidity shortage

KATHMANDU, JUN 07 -

In yet another case of a financial institution falling prey to bad corporate governance, the People’s Finance Limited closed down its operations on Monday. The company failed to give back people’s deposits due to shortage of adequate liquidity.

The People’s Finance case is one that has always been feared in the Nepali financial market—higher exposure to real estate leading to failure of financial institutions. According to Nepal Rastra Bank (NRB), the finance company has around 60 percent loan exposure to the realty sector, which it could not recover on time to maintain adequate liquidity.

After struggling to pay back depositors, the company itself wrote to the NRB on Monday to allow it to shut shop for the time being. Such was its condition that it had only Rs 2.5 million liquid cash.

NRB says the company’s liability is around Rs 950 million. Of the total loans, about Rs 600 million has gone to the troubled realty sector which it is struggling to recover. The company’s executive chairman is out of contact for now, according to the central bank.

With the company facing acute liquidity shortage, it asked the Cheque Clearing House at the NRB on Monday not to clear its cheques.

President of the Finance Company Association of Nepal Rajendra Man Shakya said he reached the company’s head office to take stock of the situation after learning of its letter to the clearing house.

“I met the second man of the company and asked him to inform the central bank of the situation immediately,” Shakya said.

Terming the trend of financial institutions plunging into trouble one after the other a “major setback to banking industry,” he said they wanted to address the liquidity crunch of People’s Finance by providing certain loans. He, however, said all finance companies are in a tight liquidity situation at the moment.

The issue was also discussed in the board meeting of the central bank on Monday. “We directed the NRB supervision department to submit details of the reality of People’s Finance,” said an NRB board member. “We have sent a team to take stock of the situation at the company.”

The two-decade-old finance company was struggling to generate enough liquidity to pay back the fixed deposits of the NRB, Rastriya Beema Sansthan (RBS) and other institutional depositors whose deposits would be maturing at the end of the current fiscal year.

According to an NRB source, the central bank’s fixed deposit of around Rs 70 million and RBS’ deposit of around Rs 50 million are maturing at the end of this fiscal year. As of last fiscal, its financial situation was not bad with its capital adequacy ratio remaining at 32.52 percent. According to an NRB board member, the finance company also struggled to pay back depositors’ money on Sunday too. With several B and C class financial institutions facing trouble, particularly due to bad governance, the Finance Company Association of Nepal has sprung into action.

Shakya said he asked the central bank officials not to create an environment where depositors would feel threatened. He said the central bank’s refusal to provide deposits in finance companies last month also brought public confidence in the finance companies down.

NRB officials have been suspecting that finance companies are more vulnerable due to their higher loan exposure to the realty sector. The case of People’s Finance has verified this fear. According to the NRB, finance companies in Nepal have lent Rs 24 billion to the sector as of last fiscal year.

Posted on: 2011-06-07 09:07

PRITHVI MAN SHRESTHA,http://www.ekantipur.com/2011/06/07/business/another-fi-falls-prey-to-bad-governance/335298.html