"Adopting Basel- II is not that difficult"
Srinivasan Iyengar, Chief Operating Officer - Credit Risk, Wholesale Bank of Standard Chartered Bank, and the person responsible for implementing Basel-II across the Standard Chartered Group, was in Kathmandu late November during when he conducted a half-day workshop on Basel-II for Nepal's bankers. Excerpts from an interview with him:
How important is it for Nepali banks to follow Basel II?
It is important because Nepal should integrate itself to the global economy. As a result of its openness and global approach it will have little choice but to increase global initiatives. If it doesn't embrace global initiatives like Basel, it will be a disadvantage. Basel is specifically designed to ensure that banks get more sophisticated in their risk management approach. It is specifically designed to ensure that capital allocated is sensitive to the risks faced by the customers. Under the current norms whether it is a customer of poor credit standing or good credit standing, the capital allocated is the same. But under Basel II, if the customer has a good credit standing, capital required will be low, and if the customer has a poor credit standing, then the capital required will be high. Because the intent behind the Basel II is good, I think any outward looking economy must embrace it. There is no choice, unless it builds walls around itself.
How practical are the Basel II norms for the Nepali banks to follow in the context that they have not been able to follow even the Basel I norms?
That's a challenge. If they have not been able to follow Basel I norms, then Basel II norms will be a challenge. No doubt about it because the Basel II norms are an improvement over the Basel I norms.
They are as a continuum in terms of the things that need to be done in the Basel II compared to what needs to be done under Basel I. The challenge therefore is how do banks in Nepal get the intellectual capital required for the purpose of getting into Basel II in a comfortable fashion. The accord provides for that by realising that there would be banks in the interim stage of understanding the norms. For them there is standardised/simplified approach. As they get into it, and they are serious about it, they can go to Foundation Internal Rating Based (IRB) approach. The very serious players can go to Advanced IRB approach. It's a question of will and also how much the regulator encourages the banks in Nepal to follow Basel II norms.
How did you find the level of understanding of Nepali banks as well as the regulator about Basel II?
I don't know whether I can assess the level of understanding they possess. A number of other countries than more matured economies like the UK are just about starting to look at the Basel II norms and understand what it means to them. So, based on my anecdotal experience, I would say that it is similar to what I would find in other similar economies. The questions which were put before me were sensible. They understood the presentation quite well.
What is the likelihood of Basel II standards being abused in Nepal because of their subjective nature?
Actually, Basel II norms are not subjective. Instead they are objective in nature because the norms, especially for credit risk, are based on numbers. There is quite clearly a formula driven approach for the purposes of arriving at Basel II capital requirement under the standardised approach.
When you come to the Foundation Internal Ratings Based approach, then you get introduced to certain degree of complexities from modelling perspective. So, modelling risk related issues come up.
What loopholes do you see in it? Have some players tried to find loopholes to take advantage out of them?
It is human nature to take advantage of loopholes. The Basel II Accord is a huge improvement over the Basel I Accord in which some areas of problems were spotted. Under Basel I, whether you lend to a low credit grade corporate or high credit grade corporate, it didn't matter. The people were all piling on to the low credit grade corporates because there the margins were big. Basel II accords fix these issues.
Yes, It is a reality that there are people who try and find every single way to get round the rules. But I think that banks that are interested in good corporate governance, like StanChart for example, will not try to find loopholes. So far as StanChart is concerned, we have grafted initiatives of Basel II, not as a means of reducing capital or making more money. We want to use it to improve our own risk management practices. We had a certain level of risk management practices way back in 2001. But as they were based on a judgmental model, we found them not appropriate for Basel II. So we changed them to statistical models. As a result of Basel II we are continuously in the process of improving our risk management practices. Basel II should not be taken up as an opportunity to reduce capital. If banks see it as an opportunity to improve risk management practices then they live with the spirit of the accord.
For Basel II to be implemented in Nepal there is a need for establishment of credit rating agencies. So, what initiatives should be taken in this regard?
No steps need to be taken. In most markets, rating agencies tend to come about because there is a business need for that. Whether they flourish or not is also given by the fact that the business is to exist/flourish. For example in India, until about 3-4 years ago, there was no need for rating corporate debt issues. Then the regulator decided to disallow any issue of corporate debt unless there is rating. There was a business need created by more robust regulations. The regulation benefited the customers because it allowed customers to understand what they are buying. Previously what customers were given was a very thick prospectus, in fine print. It was difficult to make anything out of it. But now what they get is a grading. The issues are clearly understood. From the enlightened regulation perspective, it is very important to ensure that the market as a whole has the ability to become more transparent. That's what rating agencies do - make the market as a whole transparent.
Either a government/regulator sponsored rating agency should be set up or they should create a business need for such agencies. Either one or the other needs to happen. Otherwise rating agencies will not come about.
Then infrastructural development has to take place in the marketplace. You have to think what infrastructural changes are to be made in the marketplace to ensure that the rating company prospers.
"We want to provide reinsurance support to Nepali companies"
Yogesh Lohiya, General Manager of The Oriental Insurance Company (OIC) of India, was in Nepal in November in connection with the seminar on aviation insurance business organized by his company's Nepal branch. On the sidelines of the seminar, he shared some of his views on a number of aspects of insurance business in Nepal. Excerpts:
What was the purpose of holding this seminar?
There are many airlines operating in Nepal with big as well as small aircrafts and helicopters. Nepal doesn't have capacity to ensure these. The existing 17 insurance companies are all small for this purpose. So the seminar was to tell these airline operators as well as the insurance companies how we can help them.
OIC is a local company. We have been operating through a branch here for long. We understand the intricacies of aviation insurance in the local market. At present a lot of foreign exchange is going out from Nepal in reinsurance premium. If they reinsure with us, the reinsurance premium can be paid in local currency and we can provide up to 99.9 percent reinsurance. There is no other company in the market here that can provide this extent of support.
As we know the local market very well, we can benefit from it in pricing decision, technical expertise and the services that we can provide.
How is the performance of your company so far in Nepal?
Our business here grew about 15 percent per annum in the last three years in terms of premium collection. We have the largest share in the non-life insurance business after the state owned Rastriya Beema Sansthan (RBS).
This is because OIC is very quality conscious. We are not only issuing insurance policy on our own, we are also providing reinsurance support to the insurance companies in property insurance. We have developed a good portfolio for reinsurance support to local insurance companies in property insurance.
Any problems you see in the insurance business of Nepal?
In Nepal, every business house has its captive insurance company. And this has led to a number of malpractices. It is the regulator who should see into it and bring discipline in the market. With captive insurance companies there is the risk of undisciplined fund transfer from one company to another which is against the ethics of this business. So, a proper system has to be maintained regarding insolvency margins, financial strength and the network between companies.
The prospects for insurance business are not tapped at all in Nepal. The number of products is very small. In India, OIC has 187 products. This experience can be useful for Nepal.
Are there more plans of Oriental for Nepal market?
Some years ago, we thought about opening a reinsurance company in Nepal because there is no such company here. But looking at the business potential we could not go ahead. Therefore, insurance companies here are tying up with brokers abroad for small businesses. So, we need to wait until there is potential. We have not closed the chapter as yet.
