Car market crash leaves Nepal crying for cash

The sight is unusual. Hundreds of brand new cars — from Maruti Altos to Hyundai Cretas — all imported from India are gathering dust at the Birgunj Customs yard in Nepal.

A central bank-imposed credit squeeze has not just hit the auto sector but killed the golden goose for the government, which was raking it in with levies running as high as 240 per cent. Thus, an i10, which costs ₹4.5 lakh in India, will set you back ₹16 lakh in the Nepalese currency.

Despite the stiff taxes, cars were big sellers, thanks to the bank-financed boom in the last two years. In 2015-16 (the Nepalese financial year starts from July 15), even when trade was impacted for nearly five months due to the Madhesi agitation, four-wheeler sales doubled to nearly 28,000. Motorcycle sales grew even faster.

All that is history now, with the Nepalese central bank — Nepal Rashtra Bank — clamping down on the aggressive credit financing by the banking sector. It has been especially harsh on auto loans, raising the margin money requirement to 50 per cent from 10-20 per cent.

The result: Car sales have been in a free fall the last two-three months. Ergo, importers are delaying lifting stock from the Customs yard.

According to a February 27 report in Ekantipur , a top Nepalese media, more than 3,000 cars were gathering dust at the Birgunj land border next to Raxaul (in Bihar). Umed Jain, an auto parts dealer in Kathmandu, says it’s the same on the Bhairawa land border (with UP), barely 150 km from Varanasi.

The Nepalese economy is at best fragile: It is the slowest growing in the subcontinent. Its industrial base is insignificant. Infrastructure activity is minimal. Remittance is the primary source of wealth.

Political instability over decades has come in the way of long-term planning. Capital market is in its infancy and the financial sector is barely regulated.

But for a small economy, there are as many as 26 Class-A banks and at least 36 development banks and finance companies, making competition intense in the banking sector.

Analraj Bhattarai, a former banker who is now awaiting government approval to set up a rating agency, traces the problem to the April 2015 earthquake and the political agitations since that lasted till February 2016.

As trade was impacted, there was a sharp decline in the demand for finance. The government too failed to boost economic activities by making use of the aid flows for reconstruction. Flush with funds, banks turned aggressive in retail lending. This led to a serious asset- liability mismatch.

With the continued political instability, Nepalese citizens prefer short-term deposits. To compound matters, banks offer higher rates on flexi deposits that can be liquidated ‘on call’, than on savings and term deposits. The net result was while the average loan period was five years, the average maturity period of deposits was one year.

To tackle this issue, banks were told to quadruple their paid-up equity. Bhattarai feels the central bank expected the move to trigger a wave of consolidation. Instead, banks raised the money through the equity market and continued on their lending spree.

To put a squeeze on the credit market, now, the Nepal Rashtra Bank has asked bankers to restrict their total loan exposure to 80 per cent of their core capital cum deposit (CCD) ratio.

Simultaneously, another problem is brewing: The heating up of the equity market thanks to a slew of FPOs and rights issues. This has been fuelled by the aggressive push to personal loans and some suspected diversion of commercial credit.

Between March and July 2016, the Nepali stock market index surged over 40 per cent from a low of 1,318 to 1,878. The index ruled around that level till October. Then as the equity market cooled, investor shifted to real estate. At the upmarket Sanepa area in Kathmandu, for instance, land prices have doubled in the last four-five months.

But Anju Mahato, a former fund manager with Nabil Investment Banking Ltd, says that “the boom in equity and property markets is behind us.”

Though the country’s central bank is yet to accept it, Rajendra K Khetan, a Kathmandu businessman, has little doubt that Nepal faces a serious liquidity crunch, as is evident in the firming up of on-call deposit rates from 7 per cent to 12 per cent over the last two-three months.

And, he can think of only one solution to it: The government must increase capital expenditure, instead of sitting on money. It spent only 11 per cent of the capital budget in the first six months of 2016-17. “In terms of sheer numbers, this is lower than what Bhutan, an economy tenth the size of Nepal’s, has been able to spend in the first six months of this fiscal year,” wrote Ekantipur .

Bhattarai is also looking forward to a stimulus to improve the situation. But there is one concern, auto sales were a major revenue spinner for the government the last couple of years. The credit squeeze has killed this golden goose. Will Kathmandu be able to negotiate this scissor-attack of revenue and liquidity squeeze? So far, the government is only in talking mode.

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