"NBL has made honest-to-God profit"
J Craig McAllister left Nepal recently after overseeing the turnaround of the ailing Nepal Bank Ltd. (NBL) for about four years as its CEO and head of the international team of consultants (ICCMT) entrusted with this task by the Nepal Rastra Bank. Before leaving, he shared his experience with Nubiz which had also printed the first interview with him after he joined NBL. Excerpts from the exit interview:
How do you evaluate your stint as the CEO of Nepal Bank Ltd.?
This project has been successful. We (and I say 'we' because the ICCMT operates as a team working together), are satisfying both the letter of our contract as well as the spirit of what was agreed upon and more.
The overriding concern when we came here first was to stop the hemorrhaging in the NBL as quickly as possible. We have moved from six years of large mounting losses before we came to acceptable profitability - significantly in excess of what I thought possible. We stopped that hemorrhaging in the very first year and turned it to honest-to-God profit in the second year. The project deliverables have been submitted usually (but in a few cases not always) on time and always accurately and professionally done. Our objective was not to file a piece of paper by a certain date but to submit accurate information backed with solutions that were realistic for Nepal and for NBL. We were here to fix problems not file pieces of paper, particularly if those pieces of paper did not solve the problem.
The big hysteria about us not being so successful is in computerisation and I accept that. I was really disappointed with our computerisation. I had not anticipated that the staffs here were so unfamiliar with computers. It took us a long time to get the machines installed. In fact there was a conceptual mistake on the project regarding it. The Central Bank was the customer whereas we should have been the customers. We received the equipment only with a long delay. Hence the entire training programmes conducted were wasted and we had to retrain the people. The other mistake was the error in data entry which was much higher than we had anticipated and that could have been cut down if we had managed it in anticipation or by closer supervision at several levels. I accept that to be truly my fault. And there were the connectivity problems outside the Kathmandu valley. All these caused inordinately long delays.
I am pleased with the training programme which has been great. We have had active participation of the staffs and the results are evident. I remember the first credit presentation made by a staff which was a single page piece. The same person recently did a 36 page presentation that had all the bells and whistles you have in a major bank like the Bank of America or the Citi Bank. It was a totally different guy talking.
A pressing issue has been the collection of NPA. That seems to be a thing people are humming in on. But remember, the most important thing is attitude and that has improved. The second most important thing is putting appropriate capital back in the bank. That has to be matched by competent people. Otherwise we lose the capital. The government wants us to collect money, but for that it has to give us the tools. If it does not, it has to go and hunt for the money itself. The most important thing is to make sure that you don't commit the same mistakes again.
The stakeholders in Nepal need to understand that NPA collection is not fully under the bank's control. The money has already been given to those who don't want to repay it. And the documentations of such loans were very weak. Then the judiciary, the central bank and the law enforcement authorities are not under the bank's control. Without their genuinely active cooperation, it is not easy to collect NPA beyond a point. We could have turned the NPA into PA in a dishonest way for our contract period. We could have given five years holiday for the amortisation of principal, allowing non-payment of interest for first two years and by dropping the interest rate. So there won't have been events of default during the life of the contract. Had we done that everyone would be praising us but we did not like to do this in such non-professional way.
What major hurdles, internal to the Nepal Bank as well as in terms of cooperation from the regulators and other authorities, did you face in effectively discharging your duties?
Internally the NBL had very little in the way of professional standards and nothing in the manner of leadership or planning. Systems were non-existent and record keeping was not even close to being satisfactory. As you will remember, NBL had not produced an Annual Report for the three years prior to our arrival.
But as to the interference from outside, there was very little. It was because the people in our team were well-connected with those sources from where the interference would come. Though there were a few such instances in the last couple of years, now we have come out of it successfully.
We'd get calls from ministries wanting us to transfer somebody. We used to tell that we couldn't transfer him but surely fire him so that he would be able to go anywhere he wanted. In another instance, someone asked us to provide his fellow some loan and we asked him to sign a perpetual guarantee to cover the loan and that settled the problem.
You also faced a vehement opposition from the trade union of the bank in implementing some of your programs. Were the unions logical or only belligerent?
When we came in they were very belligerent. They simply didn't want foreigners in there. They hadn't had their pay increase, no promotion for six years. On the other hand, when I looked at the staff dialogues of that time, they were heavily against the management and in favour of the unions. But the management had not done lots of things that they were able to do to deal with issues as prescribed by the rules and regulations. So, I could understand their initial belligerency. The first thing we did after finally returning to profitability was to increase the allowances by 40 per cent across the board. We already have a number of promotions since then. The agreements for giving allowances were honest. We came up with a specified system. So, in that sense, they have been belligerent when they continued opposing the management. When they were on strike, they promised to do certain things and we moved it over to the central bank but the central bank didn't apply sufficient reasoning to convince them. Strikes went on for a long time. They were illogical in a situation like that. If we were planning to meet and talk to somebody from one union, the other union went on strike and vice versa. They have a certain degree of unity, but it is on such points that will kill the bank. Such unity is, for example on opposing the privatisation of the bank. They don't realise that if the bank is not privatised and its capital rebuilt, the institution will die. And that is really serious.
If you take NBL and RBB out of the system, what does Nepal have left in terms of banking? How do people out in regional hubs get their money? Who pays the pension to these same employees when they go back to the village? You can't do that without both of these banks. We aren't big enough to replace RBB, and they aren't big enough to replace us. No other bank has the resources to run a larger branch network. If the equity base of this bank is not rebuilt, the existing bank employees aren't going to have jobs and they are saying they want job security. You have job security by doing a job right. We have posted pretty good numbers (though not perfect) but these numbers are misrepresented when the union leaders stand up. I don't understand how these people, particularly those in HQ, don't understand what's going on. They see those numbers. They know exactly what's happening. They are aware of the problems we are facing. But they are not explaining the things properly to the rank and file of the unions.
It is said that (and you had the same opinion when you first joined NBL) the major problem with the staff of the NBL was the lack of skills and proper work attitude and you had planned to address that problem with appropriate trainings. Were they really training needs? How helpful have been those trainings to address these problems in reality? Does the bank need to send more people on compulsory or voluntary retirements?
When I joined the bank that was 'a' major problem. When you have so many major problems, it's difficult to put "the" in front of that. I think the attitude has changed and in many case gotten better. We have gone down from 5,600 people to roughly 2,900 people. Before we reduced staff through the voluntary retirement programme, ICCMT people were working late communicating and giving directions. The team members were the last ones out of the office at the end of the day. I walked out a few weeks ago and I felt guilty that I was the first one to walk out. I was leaving at 7:15 pm , the bank closes at 4:30 pm and we had the majority of the people still working. It represented to me the change in attitude. However, there are still some hardcore people who sign in at 10:00 am and walk out at 10:30 am come back again at 3:30 pm so that they can sign out at 4:30 pm . But training has done a good job. And giving ample training across the board and also coordinating the specific training has been beneficial. It is because of the training that the officers debate credit issues extensively. But the union has not helped. Their criticism is inaccurate. That has been a major inhibiting factor in terms of moving ahead. They criticised us for not raising deposits and not increasing the lending. But we were operating strictly as per the stipulations of the contract and the unions had a copy of this contract.
Anyway, the people in the bank are much more customer oriented than they were before but that's still not adequate. In that sense training has been very helpful, people have begun to understand where they fit in the bank. However, training is a continuous process. The training needs keep on changing with the change in time. So far we have not been able to take the trainings to the outlying branches. It is focused more on the headquarters because it is where the major activities are concentrated.
What challenges is your successor going to face and what are your major advices to him to handle these challenges?
My successor is a very confident banker and I would never presume to give him advices unless he'd come to me. It's because I have confidence in him and I know his background and his standard is the same as mine. Speaking of the challenges, he'll face different ones than I did. This is not the start of a project, and it has momentum. His prime challenge is how to keep the momentum going and how to keep the bank heading in the right direction. We operated in a different ambience. For example, I did not have to face the parliament. I have no experience for the atmosphere in which he is going to be operating. Someone may give patronising suggestions to promote this man or transfer the other. His challenge is to take the bank that is somewhere between being on its knees to standing up straight. He has to do the more sophisticated stuff.
He has to do marketing which I never had to because I was not allowed to increase deposits or loans. He has to expand his deposits, his loans. We are overly liquid. We need to recirculate money back to the economy by making new loans but we don't have enough creditworthy deals that would come and soak up our excess funds.
After studying the nature of the major defaulters in the bank loan, what psychological and other traits have you identified in them the knowledge of which would be helpful to your successor as well as the managers of other banks to deal with such defaulters? What should the bankers do as the most effective method to deal with these people?
I really don't know how to evaluate the psychological makeup of my borrowers. I'm an economist by education. I have had much more basic situations to deal with. If I don't want to pay you then there's nothing you can do to make me pay back the money. Free money is like smoking cigarettes, it's a hard habit to break. These guys are used to not repaying the principle and not paying interests. They are not going to change. Other banks are having the same problem with these very guys. My suggestion is: insist on applying the rules to either everybody or to nobody. And try to apply the basics of banking which unfortunately have been violated generally, not only in case of those clients. Look what happened in case of Enron in the United States . Bankers can at least freeze the credit lines to these people. Anyone who has been reading this magazine knows the people that I'm talking about.
In dealing with the willful defaulters, bankers, including you, have been complaining of lack of proper support from the judiciary. Do you see 'willful' verdicts coming from the judiciary or is it simply due to the lack of proper exposure of the judges to the business and banking issues? Will the proposed commercial bench help?
The judiciary functions well in case of average borrowers but not in case of big borrowers who have strong political linkages. The judges have started understanding the intricacies of bank lending and they are using that knowledge in the cases of average borrowers, but the problems are still there in big cases. There are stay orders, one after the other, from different layers of the judiciary, delaying the verdict for several years on a stretch. Even having separate commercial benches would not help much, because the judges are the same. Though some judges have developed a good understanding about the commercial cases and they are really good people with good education and experience in the judiciary, it is not necessary that only such people will be heading these commercial courts. Only the name of the court will change, but the people heading it will be the same.
The targets laid down in the contract between Nepali regulators and ICC-MT, particularly in terms of reducing the NPA of the bank, were really very high. Why did ICC (and you in particular) accept so high targets?
We were led to believe that NPA's were at 38 per cent as opposed to the 62 per cent we found. We cut it down a bit, but the government itself has not paid back the money it owes, for example, over Rs. 200 million in direct guarantees. There was a long gap between the date we signed the contract and the date we actually took over the management. While signing the contract, we expected a functioning Asset Management Company (AMC) and Debt Recovery Tribunal (DRT) by the time we took over. But still there is no AMC. Also the DRT came very late. The DRT is now very helpful, but we missed the first two and a half years of the project. We expected judicial and governmental support, as in most functioning economies, but it is not there in regard to large borrowers with influence - the 'economic renegades'. Many finance ministers changed during our project and we were called upon to explain things to each of them. A couple of them did not understand even what 'willful defaulter' means. The very first month that we were here we knew we would not be able to reduce NPA to 5 per cent or 10 per cent. We know some of this money is not going to come back ever. We could not write off a single paisa as the central bank did not have a write-off policy. When they approved a write-off policy, we sent our accounts there and it came back with comments. This went on for several times. Now, finally we too have our write off policy and this will be applied at the end of the fiscal year. But, please don't forget that writing off does not mean forgetting the loan. It is just removed from the balance sheet, but the bank can always continue to try and collect the loan.
With the recent political change, it is believed that the power connection of the big defaulters has been broken. Will this help a bit?
No. I see these people have connections even in the present power centres. The danger is not always from the top of the political echelon, but from the near top and medium range, who give suggestions to the top guys and implement those suggestions. Another point is that if a banker, for example, shuts down a big sugar mill for a loan default, thousands of cane farmers may be demonstrating on the streets of Kathmandu . This sort of power balance does not change even after the political change.
It is said that the problems like high NPA are not limited only to Nepal Bank but across the entire banking sector including the private sector banks. How is the situation in your evaluation?
The economic renegades have borrowing relationships with many banks - you only need to attend a gathering of bankers to hear the groans when certain names are mentioned. When I was sitting on a consortium meeting, the subject of loan loss provisioning came up and our bank and RBB had 100 per cent loan loss provisioning. The banker behind us said they have taken a general provision which means 1 percent. They aren't recognising the issues. On the other hand there are banks that are aggressive and running their banks well.
One of the objectives of the restructuring exercise with the Nepal Bank is to privatise it. How long would it take to do that given the present pace of restructuring going on?
At the present rate - forever. Technically it takes about nine months to go through the steps to privatise a company. But it is a hot potato that some parts of the government bureaucracy does not want to touch because it could well become a political issue as opposed to an investment issue. Moreover, most of the people I have come in contact with have absolutely no experience with either recapitalisation or privatisation of financial institutions and are not inclined to listen to those people that do have experience and knowledge in that area. Privatising a financial institution is not the same as privatising a shoe factory. It is very complicated. We identified and contacted potential investors as far back as December 2004 but we were unable to get anyone in Nepal in authority to contact the possible investor or even to acknowledge the interest exhibited. There are a lot of banks in many countries that are looking for investors. There are not a lot of qualified and responsible investors.
I hope the present finance minister understands this. Incidentally, he was the one who was there when we signed this contract.
Recently the government introduced a set of new laws (Company Law, Secured Transaction Law and Insolvency Law) aimed at better regulating the companies that borrow from banks. In your opinion how likely are these going to be effective in this objective on the basis of the provisions made in these laws?
The real issue is legal and regulatory enforcement. Passing a law is one thing, enforcing it transparently and in an even-handed manner is quite another issue. The problem for the economy is not the small or medium sized borrower that might be having difficulty. The real danger for Nepal is in the large borrowers with repayment capacity that find repayment according to their original agreement with the bank "inconvenient". Recent history clearly demonstrates that there are some people that are allowed to operate outside the law. Alternatively, you only need to go to some government buildings to see the economic renegades walking the halls to lobby for the "softening" of this regulation or the "small" adjustment to that law. Even FNCCI has made no bones about the fact that they have been lobbying the government to change some of the rules and regulations because they are too tough.
You were of the view that the concept of limited liability is not practical in Nepal particularly in realising bank loan from borrowers. What should be done to make this concept practical as without this concept properly implemented we can't expect corporate culture to thrive?
Wrong! I believe strongly in limited liability but that is only half the concept. Borrowing is not a right. Borrowing is a privilege granted only after a full analysis shows conclusively that the potential borrower has the personal character, business capability and financial capacity to honour the borrowing contract in a timely manner. Financial disclosure is a major factor in that analysis. A banking system works only if there is accurate and comprehensive disclosure of the financial ability of the borrower to service interest and to repay principal on time. In Nepal borrowers have been reluctant in the past to provide adequate financial disclosure to allow that analysis to occur.
Corporate culture thrives best in atmospheres that require extensive financial disclosure. Successful corporate cultures are based on clear standards mandating the manner and form in which that financial disclosure is to be made and supported by strong penalties when the system is abused. One needs to look no further than my own country where the system was compromised by Enron Corporation. The harm to the US economy and the many individuals within that economy is still being played out daily in corporate boardrooms and the homes of private investors across America .
I am not against limited liability I am against limited liability in the absence of other principles that make the concept work. We have asked people to give us the financial details and I am not comfortable with what we have received.
One major issue in the Nepali banking industry is the complaint of unreasonably high spread rate. What do you suggest to bring it down across the entire financial market?
First, the rate reflects risk. That's the theoretical answer. But if you look at what a home loan costs in terms of interest here, what a car loan costs here, it is lower than in the Indian market. I have a mortgage on which I pay 6 per cent in the US . When you look at the cost of funds in the market most banks have 3.5 per cent to 4.5 per cent or may be 5 per cent spread. And I guess the accurate answer is that we aren't too high. We would be even lower if the central bank had not pushed for an increase in rates to increase returns to savers. Remember shortly after governor Bhattarai took the office there was a big issue about interest rates and he was making the point that he wanted to see them higher. That raised the rate a bit as bankers were responsive to it. But the banking system here at present is just swimming in money, and that's really dangerous. They aren't putting it back into the market because the market is in the doldrums as a result of the conflict. But that's only an excuse. In fact they are not putting it back in the market because many private bankers don't feel comfortable with the risks that are out there. There are bad portfolios out there. Those banks that don't have bad portfolios are afraid of getting in and those banks who do have bad loans don't want any more. So they are very restrictive. The habit of repaying loan is very thin. So they have turned off the tap. In my opinion, the government is not issuing enough governmental papers - treasury issues, central bank issues and things like that.
To analyse this differently, when you look at the number of non performing assets the two big banks have and speculate about the NPA the other banks have, lot of guys out there are getting money for free, it costs them nothing. And they aren't repaying it. That hits the bank and that's what prompts the bank to charge higher rates. The NPA adds to the cost of funds for the banks. Thus what they charge is not so much higher from what it costs them. Therefore, the spread is actually very thin.
