"We hope Maoists work honestly"
Rabi Bhakta Shrestha, a former President of the apex chamber FNCCI, is a partner of Unilever in its Nepal venture and represents Italy as her Honorary Consul General in Nepal. Recently, he has partnered with some prominent businessmen to set up an investment management firm - National Investment and Capital Market Ltd. Excerpts from an interview with him on the current business scenario:
How do you evaluate the business environment after the change in the political situation of the country?
The situation has become better now. We are feeling good because of the agreement between the different political parties on political issues. But the parties still haven’t brought out their economic agenda. So, we are still not confident about economic stability. The political change occurred in a very short period of time. But people have to understand that economic transformation will take a lot longer. So we must give top priority to the economic agenda. Different parties must agree upon a common economic programme in a similar manner as they have done with political issues. The parties should come up with a common policy and strategy on the important economic aspects, spelling out which areas are to be given priority and promoted in the next 10 years.
The interim government is being formed and the Maoists too are going to be a part of it. How are the industrialists and businessmen feeling about this?
We have experienced different political systems - the Panchyat system, the multiparty system, the king’s direct rule and now the new democratic system is here. No matter how different the systems were with previous governments, the individuals in the leadership were similar. But this time, there are new faces in the political sphere with the emergence of the CPN-Maoists. They have shown a strong desire to lead the country towards economic development. They have emerged as a new force due to their radicalism and people are expecting a lot from them. We hope they will work honestly and selflessly. After their involvement in the government, we expect a corruption-free administrative system and that the new rules and regulations will be in the national interest.
After peace is restored, it is felt that it has become easier for industrial products to reach the rural areas and there are less strikes now. But what is the reality in your evaluation on the basis of the experience of Unilever Nepal in which you are a major shareholder?
Yes, nowadays our products are reaching rural areas and the market in urban areas is also expanding. But, Unilever could have done a lot more in this situation. The main constraint is that there is no industrial peace as yet. Industries are facing numerous labour-related problems. That is why we are still not fully confident.
Are there such labour problems in Unilever also?
There are labour problems in large industrial units in and around Hetauda. In addition to this, activities like the murder and kidnapping of business people, looting and forceful donations are still going on. Due to these reasons, there is no industrial peace as yet. Trade unions are competing to attract labourers to their rank and file and the managements of industries are facing impractical demands and pressures from these unions. Due to such pressures, work is frequently interrupted.
Do you foresee the possibility of Unilever investing more in Nepal in the current situation?
Presently, Unilever has no plans to invest here. We are still in the wait and watch mood. However, this mood is totally different compared to a couple of months back. Earlier, there was no favourable industrial environment at all but this has changed now. Still, we don’t have total industrial peace. We want the country to have industrial peace first. Then we want the government to introduce attractive programmes and packages for investors.
You have been operating units that are ancillary to Unilever. How beneficial has this strategy proved?
Today, the strategy of multinational companies is to produce few products by themselves and outsource the remaining products to ancillary units. Since employees working in such ancillaries are totally domestic, it increases the employment opportunities and also acts as a great source of revenue for the government. Moreover, as the multinational company takes the responsibility of marketing these products under its own brands and through its own network, this ensures the sustainability of the ancillary unit.
You have been associated with the Federation of Nepalese Chambers of Commerce and Industries for a long time now. But in recent years it is felt that the dignity of FNCCI has been deteriorating for various reasons. What is your opinion on this?
I have been getting similar comments from many quarters of the society and the media. Unfortunately, no one has been able to pinpoint why and how the reputation of the chamber has deteriorated. FNCCI is the apex organisation of the country’s private sector and it has to work closely with the government for the nation’s benefit. Currently, there is a lot of politics going on within the private sector itself. This may be why the general people have developed a negative feeling about it. Therefore, it would be better if the commentators pinpoint the elements that are causing damage to the image of FNCCI.
It is said that the chamber has not been able to take a stand against those who are black-listed by the banks for defaulting on loans. What is your comment on this?
Regarding this issue, the chamber should take a clear stance. The chamber must not protect those who are black-listed. Bank loans must be repaid timely as that is the money collected by banks from the general public. Black-listed people must be punished and there should be a clear policy about the actions to be taken. Nowadays, the foreign managements at NBL and RBB are exerting pressure on honest and simple borrowers who can’t go and argue with these banks. The banks have been auctioning the land and property of small borrowers whose loan amounts range from two to three million rupees. But they have not been able to take any action against big business houses. They should take serious action against those industrialists and businessmen who are not paying back loans despite their ability to do so. The chambers shouldn’t protect such big defaulters. There are also some industrialists and business persons who are not paying back loans but are still increasing their investment within and even outside the country. Some have even left Nepal. The government should investigate such cases. Actions should start from big defaulters, not from small ones. And regarding these issues, there should be a clear stance on the part of the chamber.
“Be cautious while licensing a foreign bank”
Kim Norris, Managing Director of the International Advisory Group of the Office of the Superintendent of the Financial Institutions (OSFI), a public institute of Canada created to ensure public confidence in the Canadian financial system, was in Nepal recently on invitation from by the Nepal Rastra Bank with a team which conducted programmes to educate the regulators of Nepal's banking and insurance system. Excerpts of an interview:
What is the purpose of your current visit?
We have an excellent financial system in Canada and our country has a commitment to help emerging and developing market countries to improve their financial sector stability. I am responsible for leading a group that provides technical assistance to these countries and that is why I am in Nepal this week. This is my third time in Nepal and the second time that I have brought my group here to help the Central Bank.
What are you doing this week?
We were asked to provide some training to the Central Bank in the licensing of banks - the criteria that they should think about as supervisors to make sure individuals running the banks are fit and proper and that they don't have trouble with the banks down the road. The second issue is to deal with foreign bank branches. With Nepal 's entry into WTO, there is a commitment that the Central Bank has to develop a foreign bank branch regime here. Foreign banks now come to Nepal as subsidiaries. But with the WTO, Nepal will have to allow foreign banks to have branches in Nepal . So we are talking about the criteria that we think should be followed when allowing a foreign bank to come to Nepal .
What would be those criteria?
We have to asses two things. The NRB has to concern itself with the quality of the foreign bank that wants to come to Nepal . But equally importantly, they have to also concern themselves with the quality of the supervisor of that bank in that foreign country. A foreign bank branch is unlike a foreign bank subsidiary in that with branch operation, the bank will have no capital in the host county. So to oversee a foreign bank branch, the NRB will be reliant on the home bank and that bank's supervisor for information.
What is the NRB doing for this?
The entry criteria for the foreign banks are going be a government decision in Nepal . Then the NRB will have to come up with some guidelines and directives to instruct foreign banks on how to incorporate the conditions set by the government and to also come up with regulations to supervise them. As I understand it, the WTO commitment requires Nepal to open up its financial sector to foreign bank branches by 2010. So a lot of work has to be done between now and then. And this week we were just doing seminars on licensing foreign bank branches. When we opened the seminar on Monday, the Central Bank Governor emphasised the importance of corporate governance and tomorrow we have a full day on that topic: how this is important for corporations generally but banks specifically. The types of things that we are looking for in corporate governance are the quality of boards of directors, of senior management, policies, procedures, the control etc.
You mentioned the quality of people in the organisations. What would those be?
Well, international standards would say that there has to be a test to look at the fitness and propriety of people running the banks. Do they have adequate experience, do they have a criminal background, do they have integrity, do they have financial capacity, do they understand what the banking business is all about etc.?
In Nepal , many banks have not performed satisfactorily and the Central Bank has had to intervene in many cases. Is this because unfit people were running these banks?
I am not in a position to answer that. You should ask those questions to the NRB people. In Canada however, I have worked with problem banks for many years and in every problem bank, the source of the problem at the end of the day is the people. In such banks, the people were unqualified to do their jobs. They had obviously done something incorrectly. Sometimes it is by accident, sometimes by design. But it is always the people making mistakes. That's why corporate governance is so important. It was people that have caused the problems at Enron, Worldcom and all the failures that we know about. This is the case in Canada too. I am not in a position to comment on Nepal but you can assume certain things if you are looking at that issue here. But that's the NRB's concern.
In Nepal , the Central Bank has the habit of helping other banks if they are in trouble. Have you given them any advice on that?
No, we haven't so far. In Canada , we have a different approach. We hesitate to support banks that do not have a future. Canada does not support sick banks. But the NRB feels that they have to work with the banks to help them. We'll talk to them about that and give them some ideas on that.
As you might have come to know, recently there was a run on a bank here. What is your comment on that?
In my experience when that situation would occur in Canada , that would be the end of the bank. Banking is a confidence game. If the confidence for the bank has eroded, typically, that run would not be ending and it would mean that bank's end. But here it is a different situation. As I understand it, the public knows that the NRB is involved in the bank, and I am personally surprised that that bank is still operating. In Canada , the public in the normal course of events would not know that the supervisor was involved in helping to manage a bank. But we have deposit insurance there so that calls for a different approach.
You are helping the Nepali banking sector with its entry into the WTO. How are you going about this?
We are discussing the 25 Basel core principals, the standards and codes for bank supervisors around the world. So this week we are focusing on the licensing criteria of foreign bank branches and we are starting discussions on those international standards that Nepal is expected to adhere to. Specifically, we are trying to take those core principals and help NRB come up with a regime that will be satisfactory for Nepal to welcome foreign banks here.
What should be Nepal 's concern with Basel II?
Our former Superintendent of Financial Institutions in Canada was also the Vice-Chairman of the Basel Committee and he was also the chairman of the accord implementation group for Basel II. In his words, and I believe the same is true, there is no rush for countries to move to Basel II. Countries like Nepal have to determine whether they want to go to Basel II. There is no mandatory requirement or time frame for that. From my personal perspective, I think that NRB should work to improve its methods of supervision, its compliance with the 25 Basel core principles. Those are the priority issues for Nepal . So let's worry about Basel II further down the road.
You talked about a banking regime earlier. What should the shape of this regime be?
Today there are only foreign bank subsidiaries in Nepal and these are incorporated here. They have boards of directors, capital etc. in Nepal itself. But with foreign bank branches you are totally reliant on the home bank and other jurisdictions. There is also no capital, BOD etc. here. So we are talking about how the NRB will have to rely on the home supervisor.
We had sessions this week about exchanging information with them. There have to be memorandums of understanding developed between foreign countries and Nepal to enable Nepal to get information on foreign banks. The NRB will then be able to evaluate the fitness of foreign banks and decide whether they should come here or not. The other issue is that the NRB is going to have to evaluate the supervisors of banks in foreign countries. So if a bank wants to come to Nepal but the NRB is not satisfied with the quality of supervision in that country, then perhaps the NRB should be cautious about allowing that bank to enter. The foreign bank branch will be under its home jurisdiction too. If something bad happens to the bank in the foreign country, it is going to have a detrimental effect here. We have to be aware about the foreign country's regime and we must have the mechanisms to exchange information with it.
We are telling the NRB about how we in Canada address the international codes and standards for foreign banks and maybe come up with some solutions as to how Nepal might address those. Of course our countries are different so you cannot import the Canadian regime here. We have to approach things differently recognising the fact that at the end of the day, the idea is to satisfy international codes in a way that benefits Nepal .
What should the Nepali government do to help in setting up this regime?
The Nepali government will have to come up with an idea of what those big policy decisions are going to be. What kinds of banks are we going to allow? In Canada , they have to have a specific size and some international experience too. For example, we don't want a bank from a foreign country to expand into Canada as their first international experiment. So those are the types of policy decisions that have to be made.
What are the infrastructural challenges for Nepal to come up with this regime?
From the infrastructure point of view, the Central Bank is going to decide on how they are going to evaluate applications. Do they have the resources and the capacity to evaluate them - the quality of the bank, the supervisor etc.? In Canada we have lots of experience doing that and it normally takes two years to evaluate a foreign bank branch. We do a thorough review and visit the country among other things. So it takes a lot of time and resources. Once a bank is let in, NRB has to supervise that bank on an ongoing basis. International standards say that foreign banks should be subject to at least similar supervision as domestic banks. So the NRB will not be able to favour domestic banks. These are the challenges. I know NRB has established a committee and it is serious about doing a good job so that is why they called us here.
Most banks in Nepal at present are involved in retail banking. If big banks arrive, they might also take over this sector. Can the Nepali government make laws such that the retail sector is not taken up by foreign banks?
Although some countries do allow retail banking, it is forbidden in Canada and the US . The US used to allow it but they have done away with that now. As there is no capital in the country, we are nervous about letting moms and pops and grandmothers make deposits in foreign bank branches because their deposits are under risk.
In Canada , foreign banks must only deal with sophisticated depositors; the larger commercial endeavours. For example, if a foreign bank wants to do business with a retail customer, they must create a subsidiary, they must maintain capital in Canada and they must be a member of the deposit insurance scheme. If a bank is interested in the wholesale business, only then do they have the ability to create a branch and this is much more cost efficient for a foreign bank. They do not have to maintain the infrastructure of a subsidiary. They do have to maintain a physical presence however. Sometimes, a foreign bank that wants to be a branch, just wants to be a cell bank. They just have a postal address where they can do business. We do not allow that. We have recommended that Nepal also do the same.
If a bank wants to have a branch in Nepal , we think it's a good idea they should have a physical presence and somebody should be responsible for the books and records here. Internationally, there are limits on the size of loans that banks can make. If you are a foreign bank branch, international convention would say you can make a loan of 25 per cent of your worldwide capital. So for a bank that's much larger than the capital they would maintain in Nepal that is the main attraction of foreign bank branches.
So these are the types of decisions that the Nepali government would have to make.
