"I don’t want to create havoc in economy just to recover loans"

Basu Deb Ram Joshi is one of the topnotch professional Nepali bankers with experience in managing diverse banks. Leaving a senior managerial position in Nabil Bank, he started an international consultancy and was appointed the Chairman of the Board of Directors of the government-owned Rastriya Banijya Bank to oversee its turnaround with a team of internationally selected bankers. Two months ago his team has taken the responsibility of turning around the ailing Nepal Bangladesh Bank under a contract from the Nepal Rastra Bank. Excerpts of an interview:

How is the performance of the NB Bank now?

After Nepal Rastra Bank took over NB bank six months ago, it wanted NB bank to have a new professional team. So we came in two months ago. We have almost 15 defaulters who hold 80 per cent of our NPA. This high concentration of NPA around a few borrowers was basically because of the faulty lending system at that time. Now we are in contact with all the borrowers: the good and the bad. Our first task is to recover as much as possible. Then can we think about further lending because my TOR specifies that I have to concentrate more on recovery and disposal of NPA. We have met almost all the borrowers and if you have read the papers recently, you will know that there have been a lot of advertisements - 35 days' notices and ads for the disposal of NPA. This is my main concern right now and I am happy to say that the bank is meeting its operating costs. We do, however, have a very huge "carry forward" loss that we need to meet over the next few years. I have been assigned by the Rastra Bank also to look for capital adequacy and how we are going to inject more capital is under discussion. We have submitted a capital plan to the NRB. There are various ways of doing this but I really can't disclose the details because we are taking a confidential approach. However, our plan is that the bank will be fully functional within the next year.

There were some restrictions imposed on NB Bank by Nepal Rastra Bank during the crisis days. Are they all lifted now?

The NRB has given us a TOR which says that we can lend up to three crores-funded facility and six crores-non funded facility.

What has been the progress in reducing the influence of the NB Group in the bank?

The NB group does not have any say in the bank management now. We have taken over.

How has been the progress on the employee side?

There are some problems with the staff too. There was a big lag in promotions. So, we started with the promotions from the HR department. Our staff have to be trained differently now because they were under an authoritative management. They were used to carrying out orders but I want to take a more co-operative approach. I want to get feedback and the staff have to be proactive for this. There was a severe lack of information and the credit files were in a mess. We are now changing all that. We have had a problem with reconciliation. The NRB has given me a target to make changes by Asad 1 (June 15). We are going for that. A lot of people left the bank within the last 12 months. Now we need to recruit more people because there is a big shortage of junior staff. We have just recruited 20 people at the assistant level. There was a shortage of mid-level staff as well. We have recently hired three chartered accountants as there were none earlier. All these people are needed to set the proper system in the bank. Our internal audit was not done in a proper way so it has been reorganised. We are trying to carry out audits of all the branches within this fiscal year. The audit for the fiscal year 2005-06 was just finalised last month and it shows big loss. We had to make provisions to come under the NRB regulations. Now that has been made but our capital has been eroded. Now that's another aspect that I have to think about.

So are you saying that the bank is already back on track?

Exactly. On track means we have a hold over the bank now. We can run the bank according to our policies.

Any problem with the cooperation from the promoter group?

Actually we do not have any problem with the promoter group. They have taken certain loans from us. I have been regularly discussing with them about the repayment. They have promised that they will pay us back substantially. But that has got to be proved by their actions.

When we talked to the NCC Bank, they said that NB Bank had to pay some money to NCC Bank.

I think the NB Bank does not have to pay anything. We just do not have any obligations to the NCC. We hold certain shares of NCC bank which we have to dispose off according to the NRB policy. What they could be talking about is that the promoters have taken certain loans by pledging NB Bank shares to NCC. Similarly, we have got NCC Bank shares pledged to us. So, it's not one bank borrowing from another.

The main problem of the NB Bank was that the major portion of the bad loan of the bank was on account of the bank's own promoter. Can you give further details about the progress in recovering such loans? What strategies are being followed for this?

The NB Group has given us a repayment schedule and we are trying to follow that strictly. But I cannot tell you about that schedule because it is confidential. They have varieties of companies in their group and they have borrowed from the bank by pledging shares from different institutions. Now we are asking them to make payments accordingly and they have promised us that. They are all interlinked businesses and the loans were advanced against guarantees of financial institutions. Those guarantee payments were recovered before I came here during NRB's direct management. Now we are trying to have some real recovery in this aspect. The promoters will have to dispose of some assets for that. So, we are negotiating with them. My TOR says that unless payment is made on time, I have to take the appropriate action. Even those actions have been specified in my TOR.

NB Bank was quite successful for a fairly long period despite being under the control of the same group of promoters. Does the recent problem in NB Bank indicate that the situation also in other private sector banks may be similar?

Yes, the bank was doing all right previously. Last July-end, we had deposits of almost Rs. 13 billion. But during the crisis, Rs. 4 billion was withdrawn. Now we are slowly recovering some of these deposits. Our deposit last month was around Rs. 9.70 billion. But the NRB has imposed restrictions on us. We cannot take deposits from government institutions or deposits of the Army, the Provident Fund, and of the government-owned insurance company. So we have returned all these deposits.

What do you think about the other private sector banks?

If the banking business is run properly, then it should not be a problem. There were problems here because the bank was not properly run. You know the bank basically gets deposits from the public and lends these deposits at a margin. That margin seems to be quite good because most banks are making profits. Unless you make wrong lendings, there is no question of incurring losses. If you don't properly analyse the project that you are financing, or if the borrowers are not trustworthy, which should have been taken into concideration by a good banker, or the risk factor that should have been mitigated is not mitigated, problems are created. Now we have professional management here. All the members in my team are bankers who have experience from three or four different banks. So we look at this matter in a real commercial banker's way. But as a Nepali, I don't want to create havoc in the economy just to recover loans. The economy has to survive because it has been in the doldrums. So I just don't want to take assets that I cannot dispose of. So I am trying to take as much as I can in a reasonable way. I want to follow the NRB's TOR definitely as I have to do my duty.

As a professional banker what do you think about the logic that it would be better to let an ailing bank die rather than spend public resource in resurrecting it?

This is true in developed countries. In America , a lot of banks get incorporated or liquidated. But in Nepal 's case, it is such a small economy. Now with 22 commercial banks, if there is a problem with one bank and the authorities let that bank liquidate, we will have a big problem in our hands. The NRB rightly took the decision to take over this bank and tried to resurrect it. The problem here is not such that it cannot be resolved. It is only a question of time. So I think that liquidating banks is not a good proposition. Even in India they don't do that.

I do not think there are too many banks in the economy for this. Now there will be a question of amalgamation and all that. But we could have taken action before things deteriorated to the extent they did. Had action been taken earlier, the impact would have been minimised. But that's history anyway. But once action is taken, you have to try to improve the system which we are doing now. I know that we can really resurrect this bank within a year or two because the operations are profitable.

According to a news report, the government is about to finalise a separate law to control banking related crimes. Are not the existing laws enough?

No. In the Civil Code of our country, we have a section for frauds. That is all for the bank related crimes, and this section does not have enough provisions to fully address these issues. A bank is not like other companies who work with the money of their own shareholders. When they borrow from banks, then the banks will have to secure such a loan because the bank's money is not the money of the shareholders of the bank only, it is mainly general people's, the depositors', money. So if there is any mismanagement of the depositors' money, you are trying to cheat the people. That's why banking crime is taken as a very serious offence and the punishment has to be much higher to discourage people from taking such liberties. That is why India has a banking crimes Act. If we had such an Act in this country 10 years ago, I think we many not have had the problems in various banks that we have right now. It is one of the big lacunae. I think that any effort by the management or the promoters to defraud people or misutilise resources should be severely penalised.

What are the other laws needed for this?

We don't even have a negotiable instruments Act in operation. People present cheques to the bank and they are returned for various reasons. We have cases when people have been writing cheques on bank accounts that don't have enough money. Now these people should be penalised. This has never happened in Nepal . If we had such a law, the offender's credit rating would be affected, and that fellow would suffer. They have drafted an Insolvency Act which is essential for us. But the secured transaction law that was drafted simultaneously has not been put to work as yet. These things are essential elements for proper banking. Now in Nepal you have multiple banking systems. The same person or company may be borrowing from different banks by pledging the same assets. Nobody knows about this. Before you lend to a certain person, you get information from the Credit Information Bureau. If they say "He is a good borrower", he is good as long as he is able to pay. But he may have placed the same assets for different loans from different banks. You may have heard about plenty of such cases. Fifteen years ago, a single godown was pledged for two loans; one from Nepal Bank and another from the Rastriya Banijya Bank. Yes, now we go for a different kind of lending. Now we ask for the net worth of the borrower. But the same net worth could be given to different banks and the banks don't know anything about it. There is such a tough competition in banking right now and as the Nepali economy is not expanding much, the same set of borrowers are being pursued by 22 different banks. So a crisis is imminent and when that happens, everybody will suffer.

When the existing laws like Company Act, Secured Transaction Act and Bankruptcy Act are not implemented in earnest as the governing agencies under these laws are not constituted, how hopeful are you that the proposed new law on bank fraud will not suffer the same fate?

If you want development, you have to implement all these laws. Let's be hopeful that since the Acts have come, the government will start educating people. I am a very optimistic person. At least we have the Acts. Now I think the government should think about implementing them. I have attended a few seminars on this issues and a lot of people involved in them are saying that they are optimistic too. So I think that these things will start slowly. Otherwise you are inviting disaster. You don't need an Act unless you are going to impose it. They have to be properly executed otherwise the economy will suffer. I hope the government realises this.

Now there is much discussion going on for merger and acquisition of banks and the Nepal Rastra bank has increased the minimum paid up capital requirement for the banks to two billion rupees. How do you analyse these?

The Merger and Acquisition Act has to be there once the paid up capital is increased. There are 22 banks now and a few more are in the pipeline. The Merger and Acquisition Act is essential because it regulates the amalgamation of two banks.

And then you are talking about capital adequacy and the real increase in capital. Some years ago, the NRB issued their guidelines requiring banks to have paid up capital of Rs. one billion by 2066 BS. Then suddenly during the announcement of the monetary policy this year, they reduced this to Rs. 50 crores and then two months later, they raised it to Rs. 80 crores. Most recently they said that by 2017 AD, it has got to be Rs. 2 billion. This flip flop is very surprising.

Yes, we need to have sound banks. For sound banks, you need to have adequate capital. So, two billion is not a big thing. A lot of people talk to me about how this amount can be raised. But if we look at the share issues by various banks and financial institutions, they are always oversubscribed by 40 or 50 times. This shows that the people still have faith in banks and financial institutions. But the problem lies with the promoters. If the promoters want to retain 51 per cent of the shares, then the problem starts. The well-established banks may raise their capital, it's possible for them to raise capital even by issuing shares at a premium. But new banks will definitely have to issue more to the public. So if you want to run a bank you must have adequate capital. I oppose the flip flop policy but I have always believed that you should have an appropriate capital base. If you can't do it, then go start another business. So the basic policy is sound.

Do you think that in the near future there will be a spate of mergers and acquisitions across the banks?

Yes, if the NRB does not really change its policies like they did last time. If they now insist that they have to have Rs. two billion capital then you have to make assessments and allocations every year and take adequate steps. If any bank does not do so, the bank should be downgraded. If they really implement this policy, if a bank wants to remain a bank and not get relegated to a B class development bank, either they have to increase their capital or go for mergers. But then a lot of people say that mergers in Nepal are impossible because of vested interests. To get rid of these vested interests, banks should be run by professionals and not by promoters. When a bank is run by professionals properly, the shareholders are assured of certain dividends. But the whole system hinges on how the economy grows. We have many problems in the last few years but the banks are still profiting. If the political problem is really solved, Nepal 's economy will take off. We had 6 per cent economic growth until a few years ago, but this is very low now. But it will definitely pick up if there is a political system in place. Then the banks will have adequate opportunities for investment and make profits definitely. We have to look positively on all these aspects.

So what we are doing right now is that a bank is run not as a bank but as a private limited company, in many a case. It is run by the big promoters as their private property. That has created problems in different banks. So, make the bank transactions more transparent. Let the professionals run the banks. In India they had the managing agency system introduced by the British even 80 or 90 years ago. For example, the Tatas are running certain businesses even by owning only 10 per cent of the capital of businesses. But here we need to have 51 per cent shareholding to have the company's management. Then the others are dictated and maybe even cheated by the majority shareholder. If professionals run the bank, then both the promoters and the shareholders will be satisfied. What is happening here is this: promoters are appointing their own children as managing directors. This needs to be discouraged.

Going back to this human resource problem, you said you are solving this problem. What problems did you face in this?

Basically, the recruitment process has to be transparent. As a public bank, we should try to get as many good people as possible. So as long as I am here, I will advertise, get the best people available in the market which we have done in the case of assistant level. Here a lot of banks don't advertise. They just take people by accepting applications privately. I don't know how they manage to do this. Maybe they could specify certain qualifications and get a limited number of applications. Let me cite one typical example in human resource management problem from my experience at the Rastriya Banijya Bank when I was the chairman. The rules said that any entrant at the officers level needed a Bachleor's degree. We wanted that to be changed to a Master's degree in a related subject like commerce or economics. But the rules could not be changed. So, we used to have 7,500 applications for 23-25 posts advertised. That is unmanageable.

Perhaps we should use the training institutes that we have in the country. And we have so many of them. They should provide basic banking training to people and that could be made the primary qualification for joining a bank. As a banker I feel that the education imparted in this county does not suit the banking sector or any sector at all. The theory that we teach in our schools and universities is not what we need in reality. They teach a lot of things that have no relevance.

If you ask about our bank specifically, the Rasta Bank team had already started a certain recruitment system and we are continuing this. Under this, we go for training because we want to train our people in new banking systems, like how to assess credit applications and the practicalities in a bank.