“ The norm should be capital adequacy, not paid-up capital”
Sashin Joshi, the CEO of NIC Bank Ltd. and the President of Nepal Bankers ’ Association (NBA), shares his views on the latest situation of Nepali banking industry. Excerpts from an interview:
As the President of the Nepal Bankers’ Association (NBA), how do you analyze the present situation of banking in Nepal?
The banking environment is extremely challenging. Political instability and policy uncertainty cannot be conducive to any business, whether it is banking or any other sectors. Banks’ margins are shrinking due to the intense competition in the backdrop of a lackluster economic growth. Average return on equity of the banking industry is bound to go south in the coming year. However, there could still nobe some star performers who can get their acts right. Banks are rapidly expanding their reach and new players are joining the market. However, skilled human resource is beginning to be a serious constraint. The aggressive expansion of the banking industry and lack of skilled managers are throwing up new challenges with operational risk increasing by the day. The banking industry has been very successful in weathering the storm in the last decade and has proven to be one of the best success stories in Nepal. It now needs to take itself to yet higher level by adopting best international practices both on the governance and risk management fronts, introducing new technologies, products, services and distribution channels so that the access to finance of the people is increased exponentially.
What is being done to tackle this human resource crunch?
Considering the paucity of skilled manpower, Nepal Bankers’ Association in association with Nepal Rastra Bank has taken the initiative to establish National Banking Training Institute (NBTI) with the support of Asian Development Bank. NBTI will have participation also from RMDC, which is involved in micro-finance. We will also be inviting development banks and financial institutions. NBTI will initially conduct short-term courses and eventually will set standards, conduct banking examinations and issue diplomas, thus evolving into a world-class institute. We are currently in the process of recruiting a CEO with the right credentials who could be a Nepali or an expatriate.
You had raised objection against the banking crime laws terming them too harsh on the bank CEOs. What is being done to rectify it?
This particular piece of legislation has draconian provisions. Whilst I believe that bank officers need to be held accountable commensurate with their role and responsibilities, any punishment to them for their wrongdoing should be fair, equitable and based on natural justice. Furthermore, there should be a clear distinction between mistakes of judgment and mistakes due to the omission, commission and intention. Hauling up the CEO for any loss, mistake or error committed due to omission or commission by any employee when the perpetrator is not identifiable is definitely not consistent with any measure of fairness, equity or natural justice. We will be working with the government and parliament to amend this law.
There has been repeated call from the central bank and the finance ministry to the banks to open branches in rural areas. But you have suggested to adopt alternate methods to provide banking services in the rural areas. Can you specify those suggestions?
The idea that access to finance can be increased only through the expansion of traditional brick and mortar branches is passé. There are now new technologies and telecom- based solutions, which can help disseminate banking products and services through innovative distribution channels. Branchless banking is one way to increase access to finance speedily and in a cost-effective way. One of our member banks is already in the process of introducing this concept in an experimental way through the appointment of banking agents in semi-urban areas. The technology available currently could, theoretically, make every shop or business establishment an extension of a bank making them virtual branches. This has been successfully experimented in a few African countries and in India. As of now, cost of technology is quite prohibitive due to the fact that the volume of business is initially always low. But it’s the classic chicken-or-egg dilemma. If a few banks get together and if there is some capital support from the government in the initial phase, this can take off pretty soon.
What about promoting the postal saving bank system?
Postal savings can also help in increasing access to finance specially in un-banked rural areas and must be encouraged. It will certainly supplement the financial intermediation work being done by other institutions.
The latest action initiated by the central bank against Nepal Development Bank (NDB) has raised a number of issues including the safety of the depositors’ money. How practical is it in the Nepali context to argue that the depositors should evaluate the bank before depositing their money?
There are three primary lessons to be learnt from the point of view of depositors/investors in this case:
(a) The rate of interest a bank pays should not be the primary driving factor for choosing a bank deposit money.
(b) All banks do not make profit all the time.
(c) Share prices do not hold up just because it is a bank.
Yes, it is very difficult for small depositors to analyze the balance sheet and performance of each and every bank before deciding to put money but surely, one needs to be mindful of the warning signs. And in NDB’s case, there were plenty of them going back to the period of more than five years.
The case of NDB also indicates that the central bank is ready to rescue troubled commercial banks but not other financial institutions. How justified is such policy?
NRB has sent a clear message that every opportunity will be given to erring banks to correct their course but if this is not given heed to and there is no alternative left, NRB will be prepared to take the harshest, although unpleasant, action if needed to protect the interest of depositors.
This incidence also has raised the proposal to introduce deposit insurance system. How practical will this be in view of the experience of other countries?
Deposit insurance is a double-edged sword. It will, on the one hand, penalize stronger, better performing banks that exhibit prudent governance and management practices. On the other hand, it would give a false sense of security to depositors who are indifferent to their choice of banks where they put their money. It will, thus, encourage risky behaviour among some financial institutions which could ultimately result in endemic risks. A better solution perhaps would be to give priority to small to bulk depositors in progressive order (e.g. deposits of up to Rs. 100,000 is paid first, then the next Rs. 100,000 and so on) in the event of liquidation to ensure protection to small amount depositors.
One important reform needed in the Nepali banking system is to encourage banks to lend against the security of papers other than land ownership certificates. What is the progress in this regard? What is hindering the progress in this area?
The Secured Transaction Act has been legislated and Credit Information Bureau (CIB) has been nominated as the registry as well as the implementing agency for the project. To this end, a draft agreement sent to the government is currently being reviewed by the Finance Ministry. As soon as this agreement is signed, it will open the way for execution of the law. We expect to come out with appropriate resolution on this matter very soon.
Now that some banks have already reached or are nearing to reach the paid up capital target of Rs. 2 billion, some experts are heard suggesting further increase in the minimum paid up capital requirement for the banks. How do you view this suggestion?
Capital adequacy and not paid-up capital should be the norm. If some banks want to stay small, there is no rationale in forcing them to increase their capital. On the other hand, if some banks want to expand and embark on an aggressive growth strategy they are always free to increase their capital as much as they want. Further mandatory increase in paid-up capital, in my opinion, will only help share market speculators to destabilize the market, which is not conducive to capital market development. This is what we have seen in the past.
One important recent development in the Nepali banking sector is the gradual increase in the interest rate which is already much higher than in India. What opportunities and threats do you see from this in the Nepali economy?
The increase in interest rates seen recently is purely market driven and is reflective of conditions in the financial sector —— increasing competition and unabated credit expansion fueled by inflation. But I do not agree that interest rates here are already much higher than in India. Lending rates in India for small businesses/consumer lending is still in the 13% to 15% range while the savings rate is only 5% p.a. while lending rates in Nepal is still between 9% to 11% range with some banks giving as much as 9% on fixed deposits and 5% to 7% on savings deposits in general. The borrowers in Nepal are virtually getting “free money” if one were to factor in inflation which is more than 11 percent. Furthermore, the above rates clearly demonstrate that banks’ margins or interest rate spread is much lower in Nepal compared to India or, for that matter, many other countries. Currently, lending rates in Pakistan, Sri Lanka and Bangladesh are above 15% p.a. reaching up to 20% p.a. and deposit rates are much lower, mostly in the sub-10% p.a. band.
