T he reform case experience in Nepal Bank Limited (NBL) and Rastriya Banijya Bank (RBB) suggests that it involves a lot of cost, time and managerial commitment to uplift an financial institution from an operational impasse. In the same note, after a rough ride on a bumpy road, Lumbini Bank finally seems to be on a smooth sail. The bank’s overall performance has drastically improved in the last two years after the new management took over. Earlier, its NPA was as high as 37 percent. The NRB inspection had directed to book much higher amount under additional loan loss provision, along with a portion of loan to promoters and their relatives, which was taken away without security. The source of revenue was negligible and the investors had virtually lost what they had invested in the bank. The first and foremost step that the new management took was to revive ethical standards in the corporate governance of the bank.
The bank reported a net profit of Rs 329 million in FY 07/08, a 70% increment from the previous year’s Rs 192 million. The bank had incurred a net loss of Rs 806 million in the FY 05/06. That gives a whopping 141 percent growth in the net profit over the two years. There has been a significant improvement also in the bank’s operating profit before provision. In the last two years such profit increased by 259 percent and reached Rs 152 million and Rs 220 million in FY 06/07 and FY 07/08 respectively from a mere Rs 61 million in FY 05/06. That achievement was made by both controlling expenses and increasing the income. For example, during the last two years, the bank’s operating expenses increased by only 3.78 percent while the country’s inflation rate is in double digits. The bank has reduced its staff expenses by Rs 761 thousand in FY 07/08 when compared to the previous year. On the other hand, there is a significant increment in the bank’s net interest income, commission & discount income and other operating incomes (see table).
Shovan Dev Pant, CEO Lumbini Bank Limited
Lumbini Bank’s declining capital adequacy ratio (CAR) also showed improvement from FY 06/07 onwards when it increased from a negative 13.93 percent to a negative 7.6 percent. It further improved in FY 07/08 and reached a positive 5.97 percent. The bank’s CAR had been declining exponentially since FY 02/03 till 2005/06. But then, they started to improve their earning base and became one of the strongest banks in meeting capital adequacy norms. Their fee-based income has grown multifold and they have taken conservative approach in risk exposure. Moreover, their credit quality has also changed drastically with the employees now understanding the language of risk. The bank has further offloaded the shares held by defaulting promoters, expelled them from ownership and took stern measures for the settlement of their dues to the bank.
The bank is confident that its CAR level will be higher than the minimum 11% set by Nepal Rastra Bank after it issues right shares in the market. In its annual general meeting scheduled for 14 th November, the bank’s Board of Directors is moving a proposal to increase its paid up capital from Rs 1 billion to Rs 1.3 billion through issuance of right shares in the ratio 10:3. The bank has been gradually increasing its paid up capital since FY 05/06. It raised its paid up capital from Rs 500 million in FY 05/06 to Rs 600 million in FY 06/07. At present, the bank has a paid up capital of Rs 996 million.
Lumbini Bank's Profit and Loss A/C (Figures in Rs. '000)
Particulars
15-Jul-08
16-Jul-07
15-Jul-06
Increment in 2 yrs
% Change
Interest Income
537,261
458,649
343,821
193,440
56.26%
Interest Expenses
260,390
264,765
215,553
44,837
20.80%
Net Interest Income (3.1-3.2)
276,871
193,884
128,268
148,603
115.85%
Fees, Commission and Discount
22,253
24,026
16,582
5,671
34.20%
Other Operating Income
39,185
49,681
14,578
24,607
168.80%
Foreign Exchange Gain/ Loss (Net)
14,245
13,737
20,866
-6,621
-31.73%
Total Operating Income (A+3.3+3.4+3.5)
352,554
281.328
180,294
172,260
95.54%
Staff Expenses
59,176
59,938
48,581
10,595
21.81%
Other Operating Expenses
73,052
68,683
70,392
2,660
3.78%
Operating Profit Before Provision (B-3.6-3.7)
220,326
152,707
61,320
159,006
259.31%
Provision for Possible Losses
-
-
855,593
-855,593
-100.00%
Operating Profit (C-3.8)
220326
152,707
-794,273
1,014,599
-127.74%
Non Operating Income/ (Expenses) Net
-932
1,199
-1,058
126
-11.91%
Write Back of Provision for Possible Losses
195,299
196,701
9,412
185,887
1975.00%
Profit from Regular Activities (D+3.9+3.10)
414,693
350,607
-785,919
1,200,612
-152.77%
50
5,360
-109,243
-9,412
14,772
-156.95%
Profit before Bonus and Taxes (E+3.11)
420,053
241,364
-795,331
1,215,384
-152.81%
Provision for Staff Bonus
38,187
21,942
-
38187
Provision for Tax
53,153
27,018
10,731
42,422
395.32%
Net Profit/ (Loss)
328,713
192,404
-806,062
1,134,775
-140.78%
Besides earning profit and increasing its capital fund for the last two consecutive years, Lumbini Bank has substantially reduced its non-performing loan (NPL) while raising its loans and advances. During the period of two years, the bank’s NPL has reduced by 40.41% which amounts to Rs 541 million. Lumbini’s ratio of NPL was 31.49% in FY 05/06 which reduced to 20.39% in the following year and further reduced to a mere 14.87% in FY 07/08 while the bank’s total loans and advances increased by 26.18 % in the last two years from Rs 4.25 billion in FY 05/06 to Rs 5.37 billion in FY 07/08.
On the other hand, the bank has written back Rs 197 million in FY 06/07 and Rs 195 million in FY 07/08 from the provision for the possible losses. Increase in total loans and advances with decrease in NPL and a significant amount of write back from provision from NPA in the last two years show that there has been a good recovery of the bank’s non performing loan and increment of good loans. There has been a remarkable change in the bank’s deposit concentration risk as well. The concentration of deposits on top 50 depositors has reduced to 32.9% in FY 07/08 from 54.06 % in FY 05/06.
Major Indicators
Particulars
15-Jul-08
16-Jul-07
15-Jul-06
Increment in
2 yrs
% Change
Paid up Capital
995,710
600,000
500,000
495,710
99.14%
Loans and Advances
5,367,309
4,944,501
2,983,895
2,383,414
79.88%
Non Performing Loan
797,961
1,006,835
1,339,027
(541,066)
-40.41%
Net Worth
294,758
(429,665)
(722,070)
1,016,828
-140.82%
Book Value per Share
30
(72)
(144)
174
-120.83%
Market Value Per Share
650
505
172
478
277.91%
Net Profit Per Share
33.00
32.07
(161.33)
194.33
-120.45%
Capital Fund to RWA
6.92%
-7.80%
-15.11%
0.22
-145.80%
NPL to Total Loan
14.87
20.37
31.49
(16.62)
-52.78%
Per Staff earning
2,364,840
1,384,205
(5,676,497)
8,041,337
-141.66%
Deposit concentration on to 50 depositors
33
54
(21)
-39.14%
No. of Shares
9,957,100
6,000,000
5,000,000
4,957,100
99.14%
No of Staffs
139
139
142
(3)
-2.11%
Source: Lumbini Bank
The bank claims that also the efficiency of its staffs has improved with increase in the bank’s business volume and decline in number of staffs. The overall business volume has increased by almost 70% while the number of staffs declined from 142 in FY 05/06 to 139 in FY 07/08. The bank’s per staff expenses reduced by 1.27% in FY 07/08 when compared to 06/07. Similarly its per staff earning increased by 142% over the last two years. Per staff earning has reached to Rs 2.36 billion which was Rs 1.38 billion in FY 06/07 and a negative Rs 5.68 million in FY 05/06.
Lumbini Bank’s improved performance in the last two years is reflected in its net worth and share price in the market. The bank’s negative net worth of Rs 721 million in FY 05/06 improved to Rs 292 million in the following year. The bank’s current net worth is Rs 724 million. Similarly, the bank’s negative book value per share of Rs 144 in FY 05/06 increased to a positive Rs 30 in FY 07/08. The bank turned around its net loss per share of Rs 161.33 in FY 05/06 to a net profit per share of Rs 33 in FY 07/08. The bank’s market price per share which was Rs 172 in FY 05/06 has now reached to Rs. 650.
Gradual relaxation on the restrictions imposed by Nepal Rastra Bank also indicate the bank’s overall performance, both qualitative and quantitative, have been improving over the last two years. Nepal Rastra Bank has already increased single obligor lending and deposit ceiling for the bank. Lumbini Bank is evidently on a solid path of progress in quantitative results and also in qualitative management. Says Lumbini Bank's CEO, Shovan Dev Pant: "Now our strategies are focused on long-term growth and not on quick result on our balance sheet. However, as the pricing patterns in the market are miscalculated, the basic theory of risk and return not being realized, the bank management feels that it will be a difficult journey into the future."
LIC Nepal: Ensuring Insurance
H aving started its operation in Nepal in 001, Life Insurance Corporation (LIC) Nepal, a joint venture between Vishal Group of Nepal and Life Insurance Corporation of India with public participation from Nepal, provided insurance cover worth Rs 1.35 billion in the first year of its operation itself, earning a premium income of around Rs 82 million with 7,000 policies issued.
Its first premium collection grew by around 20 percent annually until the last year, when, owing to various factors, “it just broke-even,” according to Muraleedharan. P, Director & CEO, LIC Nepal. “But we are catching up with the lost growth rate this year,” he says. The premium collection in the latest fiscal year stood at Rs. 192 million, which is equal to the amount collected the previous year.
The company recently celebrated its 8 th anniversary when the number of its insured customers reached 140,000. On the occasion, the company introduced a new product, “Bima Kiran”, which, as Muraleedharan puts it, “brings about a paradigm shift in the insurance industry of Nepal. It is the cheapest (term)-insurance plan available in the market.” The policy provides risk cover to the clients not only for the chosen term but also offers free risk cover for 50 percent of the sum assured for ten years after maturity. The minimum sum assured in this policy can be Rs 0.1 million and the maximum can reach up to Rs 1 million.
With over 230 million policies sold and its life insurance fund amounting to more than IRs. 7000 billion, LIC of India, as Muraleedharan claims, is the largest player in life insurance field in the world. “We cater to more clients than the population of the 5 th most populous country in the world,” he says about his parent company. “We come up with innovative products at regular intervals.”
Out of the nine policies that they have at their disposal in Nepal, the policy launched earlier to “Bima Kiran”, called “Jeevan Tarang”, holds a distinctive edge to it. It is a whole life plan, which provides insurance cover to the client’s entire lifetime, something new to the Nepali insurance industry. Unlike other policies that cover certain period of a client’s life, ‘Jeevan Tarang’ goes up to 100 years of age. A client has to pay premium for a fixed period but he gets insurance cover for up to 100 years or whatever age s/he lives up to below 100 years. In addition, s/he receives a 5 percent money back each year after the premium paying term as long as s/he survives. This serves as a sort of annual pension, the first of its kind in Nepal. At the end of the premium paying term, the company also pays bonus in one lump sum. Thus in effect the policy benefits three generations. Though the guaranteed money back rate in the same policy offered by LIC in India is 5.5 percent, it’s slightly lower in case of Nepal. “It’s due to the lack of long-term investment avenues in Nepal. We had to modify the product a bit in order to meet the regulations of the Insurance Board of Nepal. And, to adjust it to the Nepali market, we had to decrease the guarantee amount a little bit as well,” Muraleedharan clarifies.
Muraleedharan P CEO LIC Nepal
With 12 branches across the country and some more planned for this fiscal year, Muraleedharan informs that LIC Nepal occupies around 23-24 percent market share in the life-insurance sector. He is looking forward to bringing another policy targeted at Nepalis seeking overseas employment. “There are four or five other companies coming out with the product but ours will be distinct,” he further informs.
\Having a proven track record of about 60 years in India, LIC has extensive business and, as Muraleedharan says, it settles three claims every two seconds. Coming to its eighth year of operation in Nepal through the subsidiary, the institution is all geared up to repeat the same glory in Nepal with altogether 63 full-time employees, 8 part-timers, 2 expatriates and around 3000 active agents and, 69 agency managers putting in their best to lead the collective ambition to fruition. “Our second valuation is expected this year,” the CEO explains, “and we expect good results”.
Muraleedharan is also looking into the possibilities of linking all the existing branches together through computer network, which, if works out, will enable customers to deposit their premium at any branch, a service similar to the ABBS in banking industry.
Insurance companies have to earn profits by making long-term investment of the money they collect as premium. But insurance companies in Nepal complain of lack of sufficient investment opportunities. Muraleedharan agrees to it. “In Nepal, nobody wants to take money for investment plans of durations like 10, 15, 25 years. I see power sector followed by agricultural sector for long-term investments in case the government wants so,” he says. “We have some investments in hydropower projects but they are in the form of shares.” In India, LIC has heavily invested also in government bonds and government-funded projects. “As LIC is allowed to hold 10 percent stake in any company (except in a few) in India, it has shares of numerous blue-chip companies,” he adds. In India, LIC also has its share assigned in financing to the government projects. “LIC’s contribution in the 9 th Five Year Plan was around Rs. 1700 billion. I can say that there is no field of public life that LIC doesn’t touch in India—be it transportation, electricity, water-supply, sanitation, infrastructure or others,” he adds further. “I want the same to happen in Nepal. People’s money for people’s welfare is LIC’s motto.”
Assessing the market potential in Nepal for insurance business, he points out to the data which shows hardly two percent Nepalis are insured. “That means, out of 25 million Nepalis, only 0.5-0.6 million are insured. That raises two questions: “Are these people sufficiently insured? And what about the remaining 98 percent?” The basic problem behind this poor reach of insurance is, according to him, lack of communication and inaccessibility of certain areas. “The entire Karnali region is inaccessible by road. The social need of insurance hasn’t been realized by people here and the information gap between places has compounded the problem,” he further adds.
One problem faced by the Nepali insurance sector is the dearth of human resource trained in this field. To address this problem, LIC Nepal has been conducting in-house training programs, in which Muraleedharan himself serves as resource person in some topics. “We are trying to tie-up with LIC India for this but the problem is of distance, transport and the subsequent cost. And we have been trying to be cost effective at present,” he says. As consumer awareness level is pretty low in Nepal, Muraleedharan thinks that the regulator (Insurance Board) should initiate radio and television programs as in India to educate the people. “Some of the practices that we have been following in India are known to be the world’s best and we follow them here as well. And on my personal part, I’ll continue that,” he adds.
In order to ensure more transparency and efficiency in the settlement of claims, the company has initiated the process of forming Claim Review Committee consisting of officers from various departments of company including Legal Officer. The committee will go through all the disputed claims before making recommendations to the CEO. “This is a unique practice introduced by the company in Nepali insurance industry,” adds Muraleedharan .
The bank reported a net profit of Rs 329 million in FY 07/08, a 70% increment from the previous year’s Rs 192 million. The bank had incurred a net loss of Rs 806 million in the FY 05/06. That gives a whopping 141 percent growth in the net profit over the two years. There has been a significant improvement also in the bank’s operating profit before provision. In the last two years such profit increased by 259 percent and reached Rs 152 million and Rs 220 million in FY 06/07 and FY 07/08 respectively from a mere Rs 61 million in FY 05/06. That achievement was made by both controlling expenses and increasing the income. For example, during the last two years, the bank’s operating expenses increased by only 3.78 percent while the country’s inflation rate is in double digits. The bank has reduced its staff expenses by Rs 761 thousand in FY 07/08 when compared to the previous year. On the other hand, there is a significant increment in the bank’s net interest income, commission & discount income and other operating incomes (see table).
The company recently celebrated its 8 th anniversary when the number of its insured customers reached 140,000. On the occasion, the company introduced a new product, “Bima Kiran”, which, as Muraleedharan puts it, “brings about a paradigm shift in the insurance industry of Nepal. It is the cheapest (term)-insurance plan available in the market.” The policy provides risk cover to the clients not only for the chosen term but also offers free risk cover for 50 percent of the sum assured for ten years after maturity. The minimum sum assured in this policy can be Rs 0.1 million and the maximum can reach up to Rs 1 million. 