In the latest in its series of economic roundtables, Himalmedia’s Business Bahas went in-depth into the banking sector.
The banking sector is doing well despite the conflict, but it would do even better if the insurgency was resolved and investment opportunities expanded. Banking is a role model for other sectors of the economy because of proper regulatory mechanisms and transparency are in place.
Invited participants zeroed in on the challenges and prospects thrown up by the conflict. Will the short-term focus on consumer banking and remittances give way to bigger things? Speakers agreed this was only possible if the conflict is resolved.
Radhesh Pant
CEO, Bank of Kathmandu
•
Nepal’s banks are serving barely 15 percent of the population, and
growth has been affected by the conflict. But despite this the banking
sector has found ways to expand the market through consumer banking and
remittances. Even tough investments may be down, profits have not
dropped and part of the reason for that is transparency. Because of the
tight regulation of the Nepal Rastra Bank, banks can’t hide poor
performance like other sectors.
• If it hadn’t been for the
conflict, the banks would now have had a network of channels right to
the rural areas. We would have branches in village after village. The
rural population would have access to loans and bank services would
have expanded.
• On non-performing loans, the biggest problem is that big business buys off politicians (so they don’t have to pay loans).
Sudhir Khatri
CEO, Development Credit Bank
•
I agree, banking is regulated and transparent. Proof of this is that in
other sectors profits can be hidden and balance sheets show losses
which is not reflected in the lavish lifestyles of so-called ‘bankrupt’
industries.
• If you want to open a commercial bank today, you
need paid-up capital of Rs 1 billion, but how much capital does an
industrialist need to open an industry? It’s all bank loans.
•
Because we haven’t yet developed a ‘corporate culture’ I don’t think
there will be consolidation in the banking sector with mergers. Basel
won’t harm us, it will benefit banking. Nowhere else in South Asia
except Nepal do you have 12 percent liquidity. We have already hit rock
bottom, there is nowhere to go but up.
Narendra Bhattarai
Managing Director, NCC Bank
•
Banks are only a small part of the entire economy. So banks can’t be an
island of normalcy when everything around is abnormal. Even so, the
banking sector has a few good things going for it. Our economy is
dominated by the informal sector and the banks have made inroads into
it in the past 15 years. Insurgency-driven urbanisation has changed
consumer patterns and lifestyles and the banks have benefited. Even in
the midst of the conflict, banks did well because more Nepalis started
migrating overseas for work and remittances grew. This entire
conflict-driven cycle is factor in the growth of the banking sector.
However, the overall situation is not good. The conflict has also
affected business, villages are empty, and this hurts the national
economy. The profit banks are reaping now is temporary.
• The
reasons banks are doing well is because the informal economy is
converting to formal, the growth of transparency and remittances.
Besides, Nepal Bank Limited and Rastriya Banijya Bank have 40-50
percent market share and their reform in the past five years has had a
ripple effect on other banks.
• After the banks entered the
remittance business, the competition has brought down the cost of money
transfers. And the Rastra Bank has a system where money from
remittances are exchanged at a 15 paisa higher rate.
• After the
conflict started, there has been no investments in large capital
intensive industries. If the situation hadn’t deteriorated there would
have been big projects that would have needed financing. Such projects
are still viable, but reluctance is due to the risk factor.
• The
Rs 1 billion threshold for paid up capital is not logical. How much
capital a bank wants is its business. We need to decide whether the
Basel-2 deadline of January 2007 is desirable here or whether we need
to adapt it for Nepali conditions.
Parsuram Kunwar
Chief Administrator, Nepal Bank Limited
•
Looking at the past five years of bank dividend rates, I would say the
banks are not doing too well. Some banks may have done well, but
overall the rate of dividends has gone down.
• No one know who in
Nepal earns how much from where. If you look at company balance sheets,
there is no salary dividend anywhere for the directors yet their
lifestyles are disproportionately luxurious. This is why transparency
is important.
• Even if it wasn’t for the conflict, consumer
banking would have come to Nepal. And it’s not that there was no
opportunity elsewhere so consumer banking grew. Even in India, banks
that are doing well in other areas are attracted to consumer banking.
Suman Joshi
CEO, Laxmi Bank
•
Te main reason banks are on a sound footing is because of good
governance and risk management in the past three-four years. Internally
the banks have cleaned up their act. All this has helped.
•
Because of the lack of transparency we don’t know exactly how much
profit companies in Nepal are making, but many are actually doing quite
well. Even till five years ago, a middle-income Nepali family had to
think twice before getting a home loan. Today, it is accepted practice.
This brings a culture which requires a borrower to think about repaying
loans, so they start working harder and productivity goes up. So it is
a chain reaction that helps the economy in the long run. The banks have
adapted to the abnormal situation and learnt to survive.
• It is
too hypothetical to plan for 2010 when we don’t know if we can resolve
the conflict by then. If the insurgency is still going on then, would
international banks want to come here? There will be no big
infrastructure and no big projects. The problem is non-economic, unless
that is resolved we can’t look at the economic side of things and plan
for them. We may make-do with remittances and consumer financing for a
while but this won’t be the long-term solution.
Surendra Bhandari
CEO, Kumari Bank
•
Despite the conflict there are trends in the economy that have
indirectly helped the banking sector. They may be temporary benefits,
but it’s not as if the banks are going to go under. Investments in
garments, carpets, hotels have dried up because of the conflict.
•
In the old days, big debtors used their connections not to pay loans
and the banks used to focus on smaller debtors. But the Rastra Bank is
strict now, banks are forced to declare non-forming loans when a time
limit is crossed and this can hit the bank’s bottomline.
Surendraman Pradhan
Chief, Banking Administration Division, Nepal Rastra Bank
•
I agree that one factor in the strength of the banking sector is Rastra
Bank regulations. Until you have cash collection you can’t show it as
income. It’s not just for show.
• But the banks have indirectly
benefited from the conflict, mainly because of rapid urbanisation. This
has sent real estate prices soaring, and this has had an impact on
property collaterals Customers are paying back their loans so the bank
doesn’t seize property and auction it.
Basudevram Joshi
Banker, Nepal Rastra Bank
•
Overall, the economy has shrunk by up to three percent. If this hadn’t
happened the economy would have expanded and there would be more
capital mobility. So banks have nowhere to invest and are floating on
high liquidity and this has kept interest rates low. In addition, there
have been problems on loan repayment because of the conflict. For
example the Rastriya Banijya Bank has Rs 1 billion invested in hotels.
These loans can be repaid only if tourism bounces back, and for that we
need the conflict resolved.
• Big debtors know how to use the
court system and file a writ petition, the court easily issues a stay
order. If you look at NBL and RBB, most of the bad loans are of this
type. This can drag on indefinitely in the courts and the banks just
have to sit back and wait twiddling their thumbs.
Anil Shah
CEO, Nabil Bank
•
Bank now have to be accountable towards Nepali overseas workers because
the money they send home is such a large part of our business. Banks
have been forced to provide more reliable, more accessible and
affordable money transfers. They have appointed sub-agents in villages
so families can easily and safely collect transfers. In addition,
workers have access to Rs 100,000 in loans at 8.5 percent interest if
they want to go abroad to work.
• Now we want to tell them, why
wait till you earn your money to buy a car or home? Why don’t you build
your house or buy a car before you go abroad. You can pay while you
earn. We at Nabil have also allowed workers to open a special account,
after all they are clear about two things: to work and to earn. They
know very well which agency gives the best rate for money transfers
home.
• At present the major business for banks are remittances
and consumer banking. In the future it will be hydropower and physical
infrastructure. Today, even if we wanted to invest in Upper Trisuli
we’d need $50 million and we won’t have enough money. That is why it is
important for us to have big banks and this is possible only through
mergers and acquisitions.