"Banks need to work together"
Radhesh Pant , President of the Nepal Bankers' Association (NBA) and CEO of Bank of Kathmandu explains how banks are coping with the current situation.
How is the banking sector coping with the ongoing problems facing the economy?
The banking sector as a whole is definitely undergoing lots of challenges that may not be visible from the outside. Economic downturn, competition resulting from overcrowding in the financial sector, stringent policies of NRB and the overall political situation has resulted into these challenging times. Five years ago margins (spreads) were over 7 per cent, but today on the average the margins are lower than 4 per cent for most banks. The spread has drastically come down. This means that only efficient banks are going to survive. So, I think you will see consolidation in the financial sector whereby banks will acquire, merge, innovate, fail and they will start looking for their own niche and competencies in the market. We have already started seeing this trend in the market.
If you look at banks’ finances, in most cases, the expense ratios have been closely managed. Many banks are leveraging their technology to drive the costs down. They have become much more vigilant towards the bad/non-performing loans. Banks are focusing on having good credit policies and administering the credit well and expanding their services. Some banks have come up with very innovative products for their customers. Banks are also expanding their branch network in order to provide services to their customers and enter new markets. The bottomline is that, banks have become customer conscious and are thereby introducing efficient, quality and valuable products and services to their customers.
How about the challenges of WTO?
After 2010, there will be new international entrants in the market. We must remain very competitive. We have to operate at international standards. However, I don't think we need to fear. I believe there are enormous opportunities in Nepal which have not been made use of. Though there are 17 commercial banks, but all of their capital combined would not even equal the capital of a small bank in developed countries. If somehow, Nepal is able to capitalise on the growth of China and India, there is no turning back for the banking sector. There will be opportunities for all types of banks. So, we need to work together to address the challenges of the WTO.
Is the problem of NPA in the banking sector increasing or decreasing?
Banks are being managed professionally and relationship lending is no more in vogue. Basically it doesn't really matter who the borrower is. If the borrower doesn't pay we put pressure on him or even blacklist him. These measures are taken to reduce the already existing NPAs. We are cautious about the future as well. We are trying to be transparent among the banks as well. Once the banks start really working as a team, there will be very less room for defaulters, especially the willful ones. It is my observation that the NPAs are in the declining trend and will decline further in the future.
What is NBA doing to address this issue?
As far as blacklisting a client is concerned, I believe that has to be left for the concerned bank to decide. When the loan is given, there has to be some rationale. If the customer is willfully not paying the loan he should be blacklisted. There are cases when loans go bad because of circumstances. In those circumstances, a rational bank would always restructure the loan and help the client. But if the project is not viable it is always better to exit early rather than accumulating more losses.
As the blacklisting method did not help the banks to reduce their NPAs much, what is the strategy that NBA is suggesting to the NRB?
We are trying to be co-operative among ourselves. We are tying to exchange information. We are also working with NRB to share information among ourselves and in the market as a whole. We also need to have a clue as to how much exposure, say, group A or B has in the market. If group A is worth Rs. 1 billion and it has Rs. 5 billion outstanding in the market, it doesn't make any sense to lend to it further. That information should be available and that can be done only if the banks including the NRB cooperate and act as a team. With this strategy, we can definitely reduce NPAs in the future.
With the signs that the economy is going through a period of stagflation, how do you see the dangers ahead for the banking sector which is increasing its exposure to consumer lending?
Banks started out with consumer lending just recently. Basically this was what the financial institutions had started, but as the cost of funds of banks is much lower they can extend these loans at lower rates. But in general, the growth rate has slowed even in consumer lending. So, banks are not so aggressive now in consumer lending. Unless and until the banks get into the rural areas, I don't see much growth taking place in the future in consumer lending.
Now we need to look for some other areas as well. It could be micro-finance or small medium enterprise lending. These investments can have broad and multiple impacts on the economy and can be proven very good in Nepal. However, we must realise that it doesn't happen overnight. You have to have good systems, technologies, know-how and capable human capital.
Although the banks are extending their network there is a big demand for lending in the rural areas still unfulfilled. How do you see it?
A lot of banks are opening their branches not only in Kathmandu but in different places. Despite the current circumstances I am sure you will see many banks opening branches outside Kathmandu in the future. However, to be honest, we have not penetrated those areas sufficiently and people there just don't have the habit of banking. It's a very difficult market to penetrate but once you penetrate it the future is yours. A lot of banks are looking into penetrating the rural areas, focusing on remittance and other areas of the economy.
How has been the experience so far of the banking sector with the new Company Act?
Since all the banks had to re-register, we had to change the statute keeping the new act in mind. There are, however, certain discrepancies between the Company Act and Banking and Financial Institutions Ordinance (BAFIO). For example, the requirement of independent director is different in the two laws. But we hope this and other discrepancies will be streamlined and resolved in the future.
In what ways can NBA help the other sectors?
When other sectors do well, banks will also prosper. Banks can definitely be experts at analysing different sectors. Banking is not just about finance and accounting. What I feel is that, banks can add value by enriching their advisory services to include sector analysis and strategies. Working hand in hand with various sectors, meaningful strategies can be made for those sectors. So, in a country like ours where hydropower sector has a good potential, why not hire hydro engineers? Banks can also hire some genetic engineers to focus into herbal products. I have not yet seen bank's playing advisory roles. But that is bound to happen in the future.
What is NBA presently doing?
We are trying to be included in making decisions that affect the financial sector. In other words, we want to be consulted while making any such directives, Act or Law that is pertinent to our sector. We would like to have a coordinated effort in resolving differences. We are also increasingly enhancing our relationships with the NRB, the Ministry of Finance and the business. We are also closely coordinating among ourselves in sharing information. Other than that, we are enriching Credit Information Center (CIC), organising talks, seminars etc., partnering with other associations, enhancing NBA's image. We are also working in the areas of training and cheque clearing. We would also take an active role in disseminating information to our customers and educating them on various products and services.
“Cost of being honest is reduced a lot"
Dr. Roop Jyoti, Minister of State for Finance, explains the logic of the recent drastic changes in customs tariff.
Does the renewed Fiscal Ordinance, which was made public on January 14, herald significant change in the country's business regime from the manufacturing based to the trading based?
The intention is not that. Though it may bring that kind of a result, that is not necessarily bad. You have to encourage and promote any economic activity which generates employment and revenue.
By drastically reducing customs duty on third country items that in the past were regarded as being re-exported to India, you might have disturbed a hornet's nest as it is feared that India will again object to Nepal's customs reduction. What is your comment?
That might have been the case 15 years ago but not any more. Most of the items that we have addressed (reduced tariff) are those that are at this moment being smuggled into Nepal from India. About 80-90 per cent of these items are like that. So, nobody can say that we are going to encourage smuggling into India.
Though your expectation that reduced customs tariff would encourage importers to declare their imports honestly, the importers are still found sceptical as by doing so they are more likely to fall prey to the tax officers who are still wielding a lot of discretionary powers. What specific steps are being taken to reduce such powers?
Overall, the cost of being honest is substantially reduced. Once the transactions are properly recorded with the bills being received and issued for each transaction, the accounts will be much more reliable. Businessmen fear mainly due to the lack of knowledge about the tax policy and rules. To take care of this problem we have introduced tax counsellors. We have already certified over 500 such tax counsellors and I hope this number will increase geometrically in the coming months. In the next two months I hope the number will grow to a thousand. When these counsellors start helping the businesses, mainly the small and medium businesses, most of their fears will vanish. These counsellors will not be stationed in Kathmandu alone, but in all the major business centres. Discretionary powers with the tax officers are necessary to some extent. So we cannot do away with that. But when the taxpayers are knowledgeable, for example with the help of the tax counsellors, the tax officers will not be able to misuse their discretionary powers.
Why was the VAT threshold hiked to Rs. 200,000 per month from Rs. 2 million per year? Rather was the need to reduce it to expand the VAT coverage?
It is not a hike. It is just a measure to strictly implement the threshold. Otherwise, we would have to wait for a whole year to see if the annual transaction is over Rs. 2 million. Now if the transaction in any month exceeds Rs. 200,000, you will have to register yourself. We have also come up with other measures to implement the VAT threshold. For example, if your stock is over a certain level, you must register with VAT. This level is different for different items. For example, if you are selling cement and your stocks at any point in time are over Rs. 100,000, you must register with VAT. So it is not increasing the threshold. Rather it is to take care of the seasonality. This is going to make it easier to impose the threshold of Rs. 2 million.
How does this revision in the customs duty help in increasing the horizontal and vertical integration of the Nepali industries?
Our main intention this time was to minimise underinvoicing and to bring all these goods into the mainstream so that VAT could be collected properly at the retail level. However, these measures of the Ordinance are not against the idea of promoting vertical and lateral integration of the industry.
What about the theoretically inconsistent terms (e.g. excise on services like foreign employment and health service)?
It is a traditional concept that excise should be applied only on manufacturing. Excise can be imposed also on services according to our amended Excise Act.
The Fiscal Ordinance issued in July last year had opened some new areas for foreign investment and so far no foreign investor has shown any interest in investing in these fields. Why were there no measures incorporated to ensure implementation of the measure of the July Ordinance?
The July statement was a policy statement while the January statement is only about the minor changes in the rates. Therefore, the policies announced in July are still valid. If the environment is good, the investment will come. And I hope that the environment will be better with the new tax regime.
How do you justify the step to reduce customs duty on mustard seeds as, logically, this step is discouraging local farmers?
It is done only after thorough discussion with the industries concerned. Second, it is found that mustard seeds are hardly cultivated in the country now. And if there is any cultivation, there is no VAT imposed on the domestic mustard seeds unlike for the imported seeds. That is very good protection for the local farmers.
The greatest challenge to the government at this juncture was to check the inflationary tendency. How has the ordinance addressed this challenge?
This is only a finance ordinance, not a policy document. So it is not possible to address many issues from such a document.
What other features of the present Ordinance do you identify as helping boost the economy?
Low taxes will help boost the economy. I think retailing is big business, it employs a lot of people. It will also help in making Nepal a destination for shopping. Why are Nepalis going to Malaysia, Singapore or Bangkok? Many of them are going there for shopping. We have other plans as well. We will let you know about that when the right time comes.
Any important message that you would like to convey through our magazine?
One important message to all the consumers: when you buy anything, please get a proper bill. If it is a VATable item, make sure that you get the VAT bill and Jagaruk Upabhokta coupon so that you may win a prize. When all the consumers do it, our economic system will undergo a very positive change. All the things will become transparent and correct.
