Poultry in Chitwan
Post-harvest Problems
Poultry farmers in Chitwan are mooting investment in the post-harvest business
Over the last 23 years, the poultry industry in Chitwan has matured a lot. The sales revenue generated from this industry in the region is Rs 15 million per day, which is greater than earnings from remittance (Rs 14 million per day). "This is enough to show the height attained by the poultry industry in Chitwan," says Tika Ram Pokharel, Managing Director of National Breeders Nepal (P) Ltd.
According to statistics, there are over 1.5 million chickens in Chitwan district alone. Chicken consumption in Nepal is around 150,000 kg per day, 1.8 million eggs are sold everyday and the demand is increasing by 10 to 12 per cent per year. About 65,000 people are directly employed in the poultry industry throughout the country while around 400,000 more are indirectly involved in it. These statistics simply signify the growing importance of the poultry industry in the Nepali economy.
However, like other agro-businesses, the poultry industry carries substantial risks too. Despite the high risk of the outbreak of poultry diseases, insurance is still not practiced in any of the farms. The reason cited is the high premium rate. "Between 40 to 70 per cent of the total capital in this industry is in the birds," informs Gunachandra Bista, Chairman of Avinash Farms indicating to the level of risks. "A few months back, rumours of bird flu dragged the prices of poultry products down by about 50 per cent. Thus, even the mention of the word 'disease' may cause a catastrophe in this business."
The bird flu scare had a pervasive effect not only on the poultry farms, but also on feeds manufacturers, hatcheries, egg producers and egg-tray producers. About 50 per cent of the inputs in the poultry industry (such as maize for the feed) come from the domestic market. A decrease in poultry sales, thus affects the maize farmers as well. In fact, it affects virtually every source of income in Chitwan. "That's why during the bird flu rumour, not even a single bike was sold in the district," recalls Pokharel.
The crux of the problem lies in the lack of adequate forward linkage. As Pokharel points out, the adverse effects of such shocks could be reduced if there were enough slaughter houses and cold storages so that the mature birds could be slaughtered and the meat stored. "We do not have proper packaging and storing systems. We lack post harvest facilities. We cannot afford to keep any inventory," laments Pokharel. After 45 days of breeding, chickens become ready for sale as their growth virtually stops from that day. If they are not sold on the 46th day, firms have to bear huge losses in terms of feed expenses. To solve this problem, industrialists are mooting the idea of setting up slaughter houses and one of the modalities for this is public-private partnership. "If there were slaughter houses, we would be able to process, package and store the chickens when the demand is temporarily low," says Bista.
That process seems to have started already. Recently, Bista's Avinash Hatchery (P) Ltd. partnered with a feed producer company, Probiotech Industry (P) Ltd., and set up Avinash Farms (P) Ltd. with a plan to develop it as a completely integrated farm. This farm will have its own post-harvest facilities such as a meat processing unit in addition to the already existing hatchery and feed units. However, Bista agrees that the market is still not fully mature to commercially justify the big investment in the new facilities. "Hence the idea of public-private-partnership has cropped up," he adds.
Meanwhile, the poultry industrialists are complaining of the lack of and effective set ups to check the threat of poultry diseases spreading into the country from across the border. The government had promised to set up such system in the 9th five year plan document, but it has failed to deliver on its promise so far.
(Bibek Subedi)
KYB: Know Your Bank !
By Ashish Garg
After KYC and KYCC, it is now time for KYB while the first two were the buzzwords after 9/11 and Osama bin Laden's terror, KYB is about consumer protection, healthy banking practice and the choice of the right bank.
KYC - Know Your Customer:
A bank must know everything about its customer -such as his background, credibility, financial status etc- before sanctioning any loan, issuing credit cards or providing other financial services. The main objectives behind knowing one's customer is to avoid fraud and to reduce, if not completely eliminate, defaults; money laundering; and illegal transactions. This includes determining the source of funds for each deposit and reporting any "suspicious" activity in an account. For the first time in history, banks are being called on to act as surrogate law enforcers and to spy on the daily transactions of all of their customers. Under the US Patriot Act of 2001, KYC is now mandatory for all US banks, it has been fully implemented in India since August 2002 and recently the NRB has also introduced KYC guidelines in Nepal.
KYCC - Know Your Customer's Customer:
Moving deeper into the KYC, we see that a bank should also try to know about its customer's customer. Be it a company or a financial institution, a bank should know who its customer is dealing with and what risks this poses in terms of credit, deposits or other banking services.
KYB - Know Your Bank:
Now it's the turn of the consumer of banking services to know his bank. On the one hand it is the customer's responsibility to be vigilant and informed about his banking rights and responsibilities. On the other hand, the onus lies on the bankers to not only be transparent in providing various services to their customers but to render services efficiently as well. Though there are a large number of financial institutions in the country and the competition so increased appear to be compelling the bankers to improve on both these counts, a lot still needs to be done. Most banks, especially banks which are yet to mature, need to perform in this regard.
Bank fees are a fact of life these days but taking a little time to understand how they are applied can help customers compare different accounts and keep fees to a minimum. Unfortunately the task has become a little harder with a number of institutions developing innovative ways in which fees are levied. Charges levied by banks need to be explained to the customers and generally a huge variation is found in the charges levied by different banks for the same set of services.
Let's look into some cases which occur daily in banks in Nepal:
A customer approached the glittering office of a leading commercial bank of the country for a project loan to finance his new venture. A term loan was approved to be repayable in seven years in 28 quarterly instalments. The delays in sanctioning of the loan and fund constraints led the customer to bow down to all the hidden charges relating to loan disbursements like a processing fee, a ledger fee, an account maintenance fee and an exorbitant interest rate etc. A year later, the customer was approached by another bank with a tempting interest rate to swap his loan from the existing banker. The ignorant customer was elated at the prospect of reaping the benefits of competition among Nepali banks. All documentation including loan application, balance sheet etc. were provided to the new bank and a loan sanctioned thereof. But to his utter dismay, when he approached the older bank for repayment of his loan, his attention was drawn to a clause in the loan agreement which stated, "Any prepayment of loan prior to its due date shall attract a prepayment charge of 0.5% per quarter for the unpaid amount". This meant that a seven year loan with an unexpired life of six years would attract a prepayment charge of 12% (0.5% per quarter for 24 quarters). The customer was not vigilant in understanding his rights and duties while signing the loan agreement which had this clause in fine print. Therefore, the advice to the customer should be - KYB.
A customer approached the front desk of a busy branch of a commercial bank to open a savings deposit account. He was provided a savings deposits account opening form. When the form was handed over to the smart teller, he was offered to open a premium savings account with a minimum balance of Rs. 100,000 and a free locker. The customer was worried about the ever increasing spate of robberies in Kathmandu and the offer of a free locker was too tempting. The premium savings deposit application form was again filled and the ignorant customer never realised that he would not earn any interest on a minimum balance. The cost of locker rent is much less than the interest lost on the minimum balance. Hang on...There are other strings as well. If the agitated customer wishes to close his account, he would be charged a special levy of Rs. 1,000 for closing the savings account within six months of opening it.
A resourceful entrepreneur finally started the work on his idea of establishing a pharmaceutical company. The factory needed a continuous flow of investment over the next five years. Unaware of the concept of the Single Obligor Limit, i.e. the maximum amount which a bank can lend to single person/group, he approached a small bank to meet the requirements of his large project. After two years, the entrepreneur was shocked to know that his bank was constrained by its Single Obligor Limit and could not fund his additional requirement through it. He was forced to move to another bank and bear the exorbitant swap charges and go through a lot of hassle.
Ignorance is not an excuse. Know your rights and obligations before buying any banking product. Know your bank's financial strength, the strings attached to various relationships with the bank, and know the match between your expectations and what the bank can deliver. Choose the bank that best fits your needs. You have to figure out exactly what you need from a bank. Once you know what to look for, you can quickly evaluate the competition and end up with the best deal.
Let us analyse how to open a deposit account through KYB principles
What Will You Do? The first question to ask yourself is what you want to do with your bank account. Do you want to put money in there periodically and watch it grow? Will you move money in and out quickly? You need to know what your banking behaviour will be like in order to find the right bank. Are you ATM dependent, and do you draw numerous cheques?
How will you do it? Next, get an idea of how you prefer to do your banking. If your schedule doesn't work with most bank schedules, the best bank might be the one that's open at convenient times. If you're a web-savvy customer, look for the banks that will make it easy to do your dealings quickly and efficiently with the click of a mouse.
What's it worth to you? If you value certain services or conveniences, you may be willing to pay for them. Once you get a hold of fee schedules from competing banks, consider if it's really going to bother you to pay a few bucks each month for that "got to have it" feature or service.
Get opinions - Finally, remember to ask other people for opinions. Ask your friends where they bank, and how happy they are. People upset at the bank are motivated to spread the word - but happy customers often don't even realise that they're happy.
Shop around - Once you know what you want, start shopping and comparing. Call or walk in and ask - this will give you a preview of the customer service. Look for fee schedules, minimum balances, rate sheets, and hours of operation while you're hunting.
Want a one-stop-shop…Look for a bank that has everything you need: auto loans, mortgages, revolving loans, deposits, remittances, other investments, and more.
Establishing a strong relationship with your bank can make all the difference in the world to the success of your business in the years to come. Think of your bank as a financial partner and get to know the people, products and services they have to offer. Establish a two-way communication, check in with them often and take advantage of the advice and information they have available.
Find the right bank and the right banker - Find a bank that is interested in your type of business, and then find someone at that bank with whom you can be comfortable.
Get to know other players within the organisation - Have a relationship with the bank and not just one individual. Get to know your banker's assistant as well as her or his boss.
Establish credibility - Through conversations and presentations of business plans, show that you have done your homework and know your business and its industry. Don't be afraid to admit what you don't know, ask for help and seek expert advice. A bank is not just a lender but a partner and an advisor.
Demonstrate that you are reliable - Meet the commitments you have made to your bank. If you miss a loan payment or fail to provide financial information on time, this may become part of your business record. When you can't meet a commitment, advise your bank well in advance and request assistance.
Share information - Keep your banker informed of anything that might impact the way your business and your account are operating. Share articles of interest about your industry with your banker. Invite your banker to a special company event.
Be proactive with bad news - Report bad news, before your banker hears it from others; let your banker know that you are in control of the situation. Report bad news along with your plan on dealing with it.
Insist on an annual financial tune up - The financial needs of your business are constantly evolving, as are the many products and services provided by financial institutions. Take the time, at least once a year, to meet with your banker to go over the financial and banking needs of your business.
Keep the channels of communication open - Let your bank know when they are not meeting your expectations. Give them an opportunity to make it right. It is important to communicate your expectations.
Banking is a great two way relationship and when practiced with transparency and mutual trust it can result in amazing returns. Enjoy the pleasure of banking!
(Garg, CA, CISA, Management Team, Rastriya Banijya Bank)
Run on NB Bank
Lessons to Depositors
By Santosh Pandey
The Nepali banking sector experienced an unprecedented run of depositors last month. It does not require a rocket scientist to conclude that the recent run of the depositors on the Nepal Bangladesh Bank (NBB) is a classic example of poor governance and regulatory negligence. But on the positive side, it was good to see people showing concerns over the activities of an institution where they had deposited their hard-earned money. This incidence also showed the effectiveness of the media which played a vital role in spreading awareness about the financial ill health of NBB.
It was not the first time in Nepal when a financial institution had become insolvent but the way the depositors reacted to the news was quite unprecedented. The Nepali depositors had never shown such concern before this. Unlike in some other countries like the US, deposits in Nepal cannot be insured. So the reaction to quickly withdraw money on the part of vigilant depositors was perfectly natural after hearing about the looming crisis in the institution to which they had entrusted their money. Upon observing the initial rush, other depositors followed suit and this led to a phenomenon popularly known as a bank run.
Calomiris and Gorton suggest that the sudden withdrawal of deposits comes as a result of asymmetric information that exists between the bank management and the depositors. The depositors do not know the bank's actual position and this creates an inherent difficulty on the part of the depositors in evaluating the risks taken by the bank. Once there is some news that dents the depositors' confidence, every depositor tries to be the first person in the queue to withdraw money as they are paid in a first-come, first-served basis. This is exactly what happened to NBB last month.
Trying to get to the root cause of the problem, one can easily conclude that there are three parties in this fiasco - the Central Bank for its many failures, the NBB board of directors for their dubious intentions and the NBB management for its delinquency. The central bank's lack of timely action, its reactive (rather than proactive) nature, leakage of insider information (which allowed the NBB Board to obtain a stay order from the appellate court), its weak corporate governance and supervision practices are the reasons behind the central bank's ineffectiveness. The Central Bank knew about the NBB's state years ago when the NBB's financial statements started showing a sharp rise in their non-performing loans. Yet, the central bank kept quiet about this for so many years. The central bank should also have reacted strongly against the NBB Board years ago when it was apparent that it was not acting according to its specified responsibilities because it was influencing the management to make unprofessional decisions and was heavily involved in mismanagement of funds (as reported in the media). This is a classic example of an agency cost. The promoters pooled in money, say Rs 750 million in total, opened a bank and then from the same bank borrowed under false names 10 times more than what they had invested and thus created holes in the financial institution. The main objective of the Nepal Rastra Bank (NRB), as it claims in almost all of its reports, is to ensure a smooth payment system and a stable financial sector and to provide sound supervision to other banks. But the NBB incident has badly tarnished NRB's image because it was unable to achieve any of its said objectives in this case.
The NRB's reaction even after the run was not appropriate. With the NRB intervening and trying to save a dying bank, a wrong message has been spread amongst depositors. This is not the first time in which the NRB has intervened and tried to save a financial institution. Nepal Bank Limited, Rastriya Banijya Bank and Lumbini Bank are three other recent examples of such interventions by the central bank. With such action of the central bank, the depositors will take it for granted that the Central Bank is always going to rescue their deposits. This will only reduce the depositors' incentive to monitor financial institutions. The result will be that banks controlled by people of dubious intentions will go on attracting deposits which will add to the cost of funds for the entire banking sector and the economy. The economy cannot afford the NRB intervening and coming to the rescue of financial institutions all the time. Sometime in the future, the NRB will no longer be able to continue its rescue operations and then, depositors who park their funds in such banks will surely lose a lot of money.
In their paper, Diamond and Dyvig (1984), suggest that depositors, who are the main creditors of financial institutions, delegate their authority of monitoring their funds to the management. The management is appointed by the Board of Directors and hence we can safely assume that the Board of Directors too wants its bit of return on investments to be protected by the management. Under these circumstances, the management of any financial institution is expected to run operations with utmost professionalism and assure all stakeholders that the institution is in safe hands. This did not happen in the case of NBB and other failed banks in Nepal. Either the management lacked quality and professionalism or they were so concerned with safeguarding their own jobs that they were adversely influenced by the Board of Directors. The people in the management had very high stakes, so they kept quiet about the flaws in their bank.
The management's strength or weakness is reflected through the level of influence the Board of Directors can wield on it. It is certainly the Board's responsibility to ensure that sound corporate governance is practiced in the organisation but there is always a line that divides the management and the Board of Directors. The directors are supposed to concentrate on policy and strategic issues while the management needs to focus more on running the businesses and compliance of the rules and regulations. However, in the Nepali banking system, the professional managers are often influenced by the directors. This is on the one hand a weakness of management teams, and on the other, an indication of the negligence on the part of the regulator - the Central Bank.
Coming to the promoters of NBB, it cannot be forgotten that various media had even gone to the extent of accusing the promoters of money laundering; a charge which cannot be ruled out easily. This was a pure case of moral hazard where the promoters would lose nothing by taking risks with the depositors' money because they had already extracted enough returns on their investments through dummy loans.
The NBB case should act as an eye-opener to all, especially the depositors. With 17 banks and many other finance companies operating in the country, it is high time that depositors are highly cautious while depositing their money in banks because upon scrutinising financial statements and quality of assets of all the banks, it can be seen that there are only a few of them that can be relied upon.
(Pandey writes on banking and finance issues)
