"Our major drive will be in SMEs"
Tolaram Dugar, Chairman of TM Dugar Group, one of the pioneers in agricultural business in Nepal, is the chairman of newly opened Sunrise Bank Ltd. that aims to specialise in SME and rural financing. In this interview Dugar shares his experience of business in agriculture and the plans and strategies of Sunrise Bank. Excerpts:
T.M. Dugar Group which has traditionally been involved in the business of agro processing, mineral water and the import of automobiles has now entered the banking sector. What is the next in the plan?
We are planning to enter life insurance sector. But, let's not forget that we started from a very small venture. In fact, we started from agro business, first as traders and later as processors. We first set up a strawboard factory at Biratnagar which makes cardboard from rice stalks and decayed papers - both waste materials that originate in agriculture. Next, we established Jute Press from where we exported Nepali Jute to overseas. Thus Golchha Organisation and we were the pioneers in this field. Then we set up food processing industries first in Dhangadhi, a very remote place in those days (some 30 years ago) and even today. At Dhangadhi we also set up a Solvent Extraction factory (based on Saal seeds) at a time when that place was not connected by road to anywhere - neither Nepal nor India . Even the east-west highway was not built. So, it was a gamble but we took the risk. It provided employment to the local populace though to a small extent and that too in the month of June during which the locals had no other employment opportunity. We bought another Saal Seed-based solvent extraction factory at Hetauda as well and shifted it to Birgunj. As we saw a good prospect of rice mill and lentil mill there and decided to set up modern such mills as well. Later, we could also export lentils to Bangladesh . It was because of our industries that the whole area around Dhangadhi could develop and local farmers could get the real price of their agro products which ultimately boosted their economic status. The farmers that were living in mud huts could now put tiles on their roofs and modify their houses. With the establishment of agro-based industries, trade on agricultural products flourished and the middlemen started to exploit the local farmers by offering prices much lower than what was offered by us. We had to issue pamphlets to make the people aware about the price of different agro products. The solvent extraction factory went to my brother after separation of the family and this factory is now closed due to illogical royalty policies of the government.
In that, we are basically in the agro-based businesses from the very beginning. In Birgunj also, we established paper-based industry. We have had our rice, lentil and oil mills in almost all major parts of the country
Why did you choose to have agro-based industries?
Because agro-based industry means they are based on domestic raw materials that are easily available in the domestic market. We didn't like to bring goods from third country for re-export.
How do you assess the industrial sector these days?
The industrial sector seems to have been weakening day by day. It's not that people didn't try to establish industries in last ten years but they suffered a lot because of lack of law and order. The country has failed to attain the kind of progress it could in the last ten years. Of course, I don't buy the view that Nepal has achieved nothing in this period. But it is also true that compared to our neighbours' ( India and China 's) progress, we achieved nothing in industrial sector in last ten years. Extortion, frequent strikes and political instability are the major hindrances our industrial sector has been suffering even today. That is why a number of Indian investors have withdrawn from Nepal .
It's been many years since you started manufacturing Frooti brand of soft drink. Why haven't you started manufacturing other similar products using Nepali raw material?
We have been producing Frooti since 2045 B.S. As far as why we have not been able to produce other such beverages is concerned, the reality is the mango pulp here is very expensive. Using pulp from imported mangoes is not profitable business. Also in India , the mango pulp used by all the industries is mainly from South India because the mango from those parts yields good pulp. We tried to grow mango here ourselves to get the pulp but it proved unviable. We planted mango trees in our garden at Biratnagar but the harvest fell far short of our expectation.
As a pioneer of agro-based industry in Nepal, what do you identify as the major bottlenecks in comercialisation of Nepali agriculture? What has been the TM Dugar's role to remove those bottlenecks? Is your company contributing any way in contract and corporate farming?
Though the Ministry of Agriculture and other line agencies have tried to uplift the agro based industry in the country, clearly it has not been sufficient. Each crop has so many varieties here. For example, we still grow hundreds of varieties of paddy whereas there are only 4-5 varieties grown in Punjab of India. With such wide varieties, it is difficult to get sufficient quantity of each variety to make it commercially feasible. The government's line agencies have failed to do proper testing of the soils in various places and recommend suitable varieties. There have been numerous workshops and seminars but there is virtually no action to change the matrix.
You might have made recommendations. What happened to those recommendations?
Yes, I did personally as well as on the capacity of the Chairman of Rice Millers Association both verbally and in writing. But nobody paid any attention to that. We have been able to progress a little in wheat crops but have failed in paddy. For example, in India, they get two harvests of paddy in a year but we have failed to do so. Particularly in the western Nepal, there is good irrigation possibility. Still, people grow paddy only once a year. Karnali river can be a very good source of irrigation, but we have failed to take advantage of that. There is no reason why we can't do here what India has been doing in paddy. But authorities here are not taking it seriously.
What has been the role of your company and the similar private companies to change this scenario?
Without the backing of government the private sector alone can do nothing. The landholding ceiling was at 25 bighas, which is not economical. And that is now reduced further to 10 bighas. Moreover, there are tenancy related disputes on these land plots. It is difficult for contract farming on such small plots. Only the government can help remove these bottlenecks. But the agencies concerned of the government have not been working honestly in those lines.
Recently you had mentioned that TM Dugar Group is planning to invest also in hydropower. Has any project been selected? What progress have you achieved so far?
We have a separate department for that and it has assigned teams of professionals to study different projects and the reports are being received. That means we are at the study phase. One issue to be borne in mind is that such projects have to be set up in very backward places where there will be a lot of issues to be resolved beginning from the acquisition of land. Given the fluid political situation, I do not think, we can move on that direction very soon.
How big projects are you looking for?
Initially, we are looking for 20-50 MW projects.
Who will be your business partner in hydro sector?
We do not have problem of finding business partners. We have good reputation. Now we have been studying 4-5 projects. To be honest with you, it all depends on political situation. If the political situation improves, we will jump soon, otherwise, we will wait.
You have recently entered the banking sector whereas many other business families came to this sector long before and the competition in this sector has been already intense? What are your strategies to catch up with the early movers?
We didn't enter the banking sector earlier simply because in the past the banking sector was not organised at all. There were a lot of instances where the unscrupulous elements robbed the bank's money which is the money deposited by the general people. There were a lot of cases where the borrowers defaulted causing massive loss to the banks concerned. There was nothing much the state or the banks could do to make the borrowers repay the loan in the past. Rastriya Banijya Bank and Nepal Bank were the victims of such malpractices. There was not comprehensive legal framework to check all these problems. We give priority to good business practices. We do not intend to earn money by undue means. I have only one son and we have good reputation. Our family has enough property to survive. I do not say I do not need money. I am a businessman hence I need to earn money but I want to earn without compromising with my honesty and reputation. In the past, it was not possible to ensure that my bank would be able to give back the depositors their money on time as that would be swiped away by unscrupulous borrower on whom my bank would have no power to force for repayment.
Now the Rastra Bank has put all the necessary legal provisions in place to check malpractices in the banking sector. Now there is also a provision to forfeit the property of the family of the defaulters. That means this sector is now much organised and regulated for sound business. That is why we decided to go into banking sector as well.
What is your strategy for success in this fast competing banking sector?
It is not necessary that all the banks will do well. It depends on how the management performs. Everywhere there is a competition but it's your integrity, honesty and sincerity that gives you an edge, be it in banking or other businesses. That is what we believe in. We are aware that it might take some years to reap benefit given the political situation of the country but we are hopeful of good prospects because we believe on our strengths. We have a very good CEO supported by professional employees. We plan to invest in sectors like hydropower where the investment is always safe. We will try to move ahead with a strategy of balanced loan portfolio and our competitive advantage is that we have latest technology which other banks could have only after decades of operation. We have entered into quite a new era of banking where the central bank has issued new directives in line with global banking practices and thus we think we have competitive advantages over the old banks.
What specifically will be your strengths?
Our major drive will be in SME sector. Our belief is that the nation cannot progress by investing only in big corporates which cater to the need of limited number of people of the society. The major corporates have been absorbing 70-80 percent of bank credit at present. The number of families getting such bank credit may be less than a hundred. We want to change this situation and that is why we want to focus on rural areas. In the beginning, we are not planning to open branches in cities like Biratnagar, Birgunj, Nepalgunj or Pokhara. In fact, we are planning to open branches at Sundar Bajar and Beshi Sahar of Lamjung, Tansen of Palpa and Damauli of Tanahun where modern banking facilities are still very little. We are also planning to open branches in under-developed places of Ilam and Dhankuta district. Only after opening branches in those places, will we open branches in cities like Kathmandu . Almost 70 percent population are deprived of modern banking facilities. They are our main target customers. We believe that we can sustain a healthy and real growth by making our strong foothold in the SME sector and rural area.
Have you done any study about the SME sector?
We have not done that from this bank but there was study done by Himalayan Bank two years ago and a business model too was developed for this purpose. We are further refining that model to suit our need.
The cost of operation in lending to the SMEs is very high? How do you plan to overcome this problem?
Definitely the cost in lending to SMEs is high but the return is also high. SME sector has been witnessing financial crunch. If you look at the micro-credit institutions, the repayment rate is almost hundred percent while the interest rate they charge is as high as 21 percent. Compare that with the big corporates who get the loan at 5-6 percent interest and the default rate is so high. The rate of interest being charged by the cooperatives and financial institutes while lending to the rural clients is as high as 13-14 percent. So, if we as a commercial bank, can provide loans at 8-9 percent interest, that will be a win-win situation for both the local people and us.
There still is security problem in the rural areas. How are you planning to tackle this problem?
We are not that worried about that also because the security situation in the hilly regions and western part of the country is not as bad as it was few years back. In the worst case scenario, the arms of our security guards may be snatched and the money that is in the vault on that particular day may be looted. We have already adopted counter measures for that sort of eventuality. Hence we are not worried much about that.
What kind of changes TM Dugar plans to herald in the agricultural sector particularly after its entry into the banking sector?
It will be in a way of facilitating the life of rural people. For example, in Dhangadhi where we are planning to open our branch has no warehouse facility for agricultural goods and the agriculture market has not yet developed. We will be providing loans for opening warehouse which will automatically develop agricultural market. Any loan granted in the rural area like Dhangadhi will eventually flow to the farmers and agriculture as there is virtually no other business.
It has been seen in many other banks that the major promoters or the chairman and directors of the Board frequently interfere in the day-to-day affairs. What have you put in place to avoid this?
We wouldn't do that. If we do that, it will be ourselves who will lose. The major promoters of our bank are from all sections of the society, such as caste and ethnicity, but they are all businesspersons. They understand what to do and what not to do in the business. The high interference of the promoters may be the case in banks where the promoters are not businessmen. In our case, we have approved all the policies, rules and manuals for the employees to follow. They can use their own judgment in day-to-day operations remaining within those broad guidelines.
Do you think that the government should do more to boost the banking sector?
The central bank has done a commendable job. Otherwise some banks would have already collapsed.
When are you planning to go to public?
Very soon. We are not going to wait for more than six months. We are going to collect all the promoters' capital soon and within this year we will reach one billion rupees. Then we will be soon going to meet the NRB requirement of two billion rupees. One positive point about our bank is that all of the promoters are financially strong and don't need to go roundabout way to arrange funds for investing more. They are eager to invest more in the bank. Our understanding is that when the foreign banks will start to operate in Nepal , even the two billion rupees will not suffice and in that case the promoters of our bank are ready to inject more capital into the bank.
Do you plan to have joint venture with any foreign banks?
No, not until our two billion rupees will be comfortable. Beyond that, we will see.
How many employees do you have?
We need only 65 but have hired extra 20 people. So altogether there are 85 employees. Those extra people will go to man the 6-8 branches that we are going to open in 6-8 months. The experience from other banks is that there is always a problem of manpower to be sent to the branch. That delays the plan. To avoid that problem, we have already recruited surplus staff. And they have not worked under any bank. So, they are not carrying any particular bank's style. We are training them to prepare for the job they have to undertake. In the senior levels too, the people are highly experienced professionals. But as they come from different banks, the style of one particular existing bank will not be dominating. That makes it easy for us to develop our own distinct culture.
