Vol. 3 :: No. 9 September, 2001 (Bhadra-Ashoj)

Sectoral

Impact of Temporary Stopping of

Land Registration on Banking Sector

By Kapil P Lohani

A month ago, Prime Minister Sher Bahadur Deuba announced a fresh package of Land Reforms Programme in the Parliament, and this move was warmly welcomed by most of the members of the Parliament. The registration of land was halted from the same day till the new arrangement (till the writing of this article). Every thing seemed okay for the time being as it was yet to be seen whether the move had any impact on different aspects of life. But from day one, the banking, industry, trade and many other sectors of Nepal began experiencing a very difficult position as their functioning fully depended on lending money by placing land as collateral.

Among these sectors, banking was mostly affected. Every day, apart from new loans and advances, the banks have to renew the expiring loans, enhance the loans according to the requirement and performance of the party, and also to sell the property of defaulting clients in order to recover the loan principal and interest amount.

While renewing the existing loans, the banks normally see the present value of the collateral. If the value has gone down to the level required for the particular loan, then more collateral is requested with the party for which they should transfer the new property in the name of the bank. Likewise, in most of the cases, it is necessary to give additional collateral for the enhancement of the loan. Again the party should provide necessary collateral to the bank. In this process, in many instances, the party may wish to withdraw some collateral and provide another collateral. All these processes involve registration of land. The banks have to sell the property of loan defaulting clients to recover the loan amount. If the registration of land is stopped for long time, all these actions are affected.

The trading activities are mostly affected by the stopping of land registration. Because it is a temporary phenomenon and the project does not take more than 150 days in most of the cases. During this time the businessmen order goods, clear the customs and other duties, sell the goods and pay back the loan and withdraw their collateral.

Doing business fully depends on time. If one fails to recognize the value of time, or if more time is involved in the completion of the project due to other factors, then the cost of project goes up and the parties will have to incur severe loss. This will directly affect their ability to repay the loan on time, failing which, they will have to pay penal interests to the bank. It is worth mentioning that the banks normally do not intend to earn money by levying penal interest on their clients as this stage of banking is risky for both the bank and the clients. So the normal situation for the banks is the environment in which the parties utilize the loan and pay back the principal and interest on time. We can take example of tourism sector. This sector is considered to be one of the most important sectors in Nepalese economy. Many hotels, restaurants, travel and trekking agencies and airlines have established and many are in the pipeline. They fully depend on the infrastructure and the flow of tourists. The former, if failed to complete on time, will have to pay a huge price. Hence, after processing the necessary documents, the banks should provide loan to them on time.

The government might have considered these facts after a week of the decision to stop the land registration for some time, and now it has partially lifted it.

HMG members of Parliament, political parties, and other responsible people have to think and assess the impact before floating any idea. Small mistakes on their part can severely damage the economy of the country. Few weeks back, some responsible leaders of opposition parties, knowingly or unknowingly, remarked that not only the land but other assets including the bank balance should also be limited to some point, say one million. This one line of rash remark has affected the banking sector in such a way that people are still withdrawing money from the banking and financial institutions fearing that their money will be taken away by the government. This has not only affected the financial sector, but has again brought trouble to the owners leaving them in a dilemma as to where they can keep their possessions safe. It is rumoured that many people have already found safer places for their possessions abroad. The only people benefiting from this capital flight are the hundiwallas. Thanks to our wise leaders and their followers.

The Ministry of Finance can play a great role in such a situation by informing the people on time. They should also constantly advise the government on the impact of the decisions made by them on the national economy. Equally important is the role of Nepal Rastra Bank to safeguard the banking sector. After

Cooperative Benefit

With Curable Headache

The pro-poor movement that has already claimed to have mobilized over nine billion rupees of deposits from lower income groups, is turning to be a headache, though is remedial.

However delayed by enough time to be discredited, Nepalese cooperatives, that claim to be the mobilizer of rupees in billions of deposits, are likely to come under the regulation of a high level directive body- if things do not go wrong. And if this, too, is not symmetric to its inherent legacy or is not ended in habitual failure, the recently formed collaborative body representing all line authorities of cooperatives (Nepal Rastra Bank, National Cooperative Development Board, Cooperative Department, National Cooperative Federation of Nepal and Nepal Federation of Saving and Credit Cooperative Union) come into action to effectively regulate the movement in its track. As always, a regulatory committee has been formed–Central Monitoring and Supervision Committee. But what next? If anything is left there to expect, that is just wait and see how they prove themselves in the days ahead!

When accountability and responsibility has come to an end with the running away of the cooperatives and the concerned authorities are busy putting the blame on others, the speculators who run the cooperatives as an ‘easy money spinning business’ have naturally enough space to exit through the back door. Twenty-seven cooperative societies have already played this gambling business within the cooperative jacket making away with a whopping Rs 150 million of public deposit within a short span of two years (see box).

One of the fundamental setbacks responsible for this plight is that cooperatives have remained a subject of ‘too many’s affiliations with no controlling hands’ in their activities despite provisions being in place. For example, only 34 savings and credit cooperatives out of 1575 registered with the Cooperative Department are allowed to do banking activities. Now the central bank's confusion is how it can monitor these cooperatives which are not allowed to do the banking deal by it. But on the other hand, central bank naturally claims its right to intervene in any monetary related matter wherever in the economy. Again Cooperative Department wants to limit itself to mere registration and pleads for manpower deficiency to regularly monitor them. They believe that the department should act as a registrar and a facilitator while banking supervision is universally looked after by the central bank.

Janardhan Acharya, General Manager of National Cooperative Federation of Nepal, opines it is but natural that the entrance of non-banking persons into the banking activities has made the matter worse. Most of the cooperatives that have run away are due to liquidity crunch as they could not maintain the necessary liquidity in their regular account. What they badly need is education on banking technicalities, asserts Acharya.

Yes, most of the town credit shops (saving and credit cooperatives) operated within the four/five years in the urban areas have premature concept of banking rather than the cooperatives. They are vastly lacking on all three operational fronts; administrative expenditure, credit management and liquidity management.

But these discrepancies apart, cooperatives, within a short span of time, and despite certain lapses in the Cooperative Act-1992 have become one of the pro-poor program designed as the ‘bank for the poor’ and have been producers of over two million jobs by mobilizing over nine billion rupees of lower-middle income and lower income groups. Cooperatives have uniquely boosted the saving habit of the people, while distributing credit to the same groups.

The banking service, which was once a daydream of lower income groups, has now become accessible. Thanks to the cooperatives, these people have passbook in hand and experience being the bank’s counter. It is credit and saving cooperatives that have changed dreams into reality, enabling millions of people to have access to affordable banking service.

But to be fair to the cooperatives, they point a blaming finger to inconsistence of policies they vehemently are opposing now is the imposition of 15 percent income tax, both on profit and dividend, that the government levied from the last fiscal year. They argue that it is impracticable to treat cooperatives like other commercial companies which are allowed to distribute hundred percent dividend. The Cooperative Act 1992, has allowed distribution of dividend to its members only upto 15 percent and has asserted that the rest should be utilized for the socio-economic betterment of the members.

Again the cooperatives argue the legality of the government’s policy –the Cooperative Act 1992 states the exemption of tax while the government has already levied 15 percent tax both on income and dividend.

But now its time to wait and see how the government policies and cooperative discrepancies will be adjusted in the days to come.

Business news | Editorial | Corporate | Cover Feature | Economy & Policy | Inner-view |
Recent Launches | Management | Marketing | Sectoral | World brief | Main |

Send your feedback to the editor: bizage@ecomail.com.np 1999 © Mercantile Communications Pvt. Ltd. P.O. Box 876, Durbar Marg, Kathmandu, NEPAL. Tel : 977 1 220 773, 243 566 . Fax: 977 1 225 407. Reproduction in any form is prohibited without prior permission. No part of the articles which appear in the internet version on BUSINESSAGE may be reproduced without the permission of Mercantile Communications Pvt. Ltd. For reprinting rights, please write to us.  Send us your feedback:contact us . CLICK HERE FOR PAST ISSUE. This site is best viewed at : 800 X 600 resolution

Back to the top