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Competition has grown tremendously in the country’s banking sector forcing the banks to distinguish themselves from their competitors. We present some glimpses into what two banks - Bank of Kathmandu (BOK) and Nepal Investment Bank (NIB) are doing in this regard.

BOK claims that its non-performing assets have decreased to only 6.6% in the first quarter of the current fiscal year. In fiscal year 2003-04, the bank increased deposits by 22.56%, loans by 23.7% and investment by 36.40% as compared to the previous year.

While making this achievement, BOK has ushered in one important trend that may be emulated across the banking sector. It has reported a massive decrease in its full time staff while increasing the number of part time staff. For example, the bank had 194 staff in the year 2001-02. This decreased to 183 in 2002-03 and to 167 in 2003-04.

“Growth & competition are the major challenges”

Radhesh Pant, MD, BOK

What have you done in your bank to manage and maintain the productivity level of your employees?

An efficient workforce can be established only when the management becomes successful in meeting the individual employee’s social, psychological and basic needs. At BOK, there exists an informal working environment and a flat structure in which employees work in teams enabling them to clearly put forward their views and become a part of the overall organizational success.

Recently BOK has been focusing on Corporate Social Responsibility through different programmes. How effective is this promotional strategy?

It is not a promotional strategy. We have other channels to promote our business. As part of our vision, we want to be good corporate citizens. We would like to contribute back into community welfare through awareness programs and through addressing issues of critical importance. For example, we organized walkathon on the World AIDS day in association with ILO to raise funds for HIV/AIDS victims and their family, because the prevailing infection among the population puts us into ‘concentrated epidemic” category. It will have drastic impact on social and economic development of the country in coming decades.

In the present context one can see commercial banks focusing more on retail banking than on corporate credit banking. Is this because of drying out of corporate lending opportunities or to gain competitive edge in the market?

Yes, due to lack of viable projects and uncertainties our focus is more on the retail banking than on corporate banking. We also facilitate loans to SMEs with simple procedures and processes and will continue to focus in this sector.

What is the biggest challenge facing BOK in the next few years?

The major challenges facing commercial banks including BOK in the next few years will certainly be growth and competition. We will need to develop competencies whereby we can differentiate ourselves from our competitors.

Explaining the logic for this, Radhesh Pant, the MD of the bank, says: “In the west, where human resource management is highly strategic, we can see banks and other institutions using a large pool of part timers to carry out day-to-day routine tasks. In recent year, BOK has adopted this approach and has lowered the number of full time staff in areas where the work entails routine day-to-day tasks and where there is little prospect for the career growth of the staff. We have employed part timers to carry out such tasks. The purpose behind this strategy is to ensure that the full timers can focus their efforts on their personal career enhancements. This, we believe, will ultimately lead to overall growth of the organization.”

BOK is also investing increasingly in technologies which may reduce the role of human resource. The examples are the use of VSAT and recent introduction of Finacle. The bank has already achieved a 1:1 ratio of computer to employees. Pant too agrees that automation may reduce the role of human resource but says, the advancement in technology will also necessitate more skilled human resource. “While routine day-to-day tasks will undoubtedly be automated increasingly, thus simplifying the tasks and enhancing efficiency, the people will be able to invest more time to perform more complex issues,” he adds.

As has been the trend across the banking sector, BOK too is massively expanding its consumer lending operations providing loans for vehicles, housing and education and loan to the professionals. At the end of 2003-04, the bank had about 10% of its total loans classified as consumer loan. It is also the first bank to provide loan to the people who want to go abroad for employment. It provided such loan to 150 people in 2003-04. The bank targets to bring in about US $ 60 million as remittance in the fiscal year 2004-05.

Another trend that is catching up across the banks is to go for lending to the small businesses. BOK too has been going about in a systematic way in this direction. The bank has already partnered with BizMantra, a recent initiative supported by International Finance Corporation to help the small businesses.

Being the only Nepali bank to have a Chinese Yuan account with the Bank of China, BOK is already ahead of its competitors in handling export-import business through Khasa, Tibet Autonomous Region of China, the route through which Nepal’s trade with China is growing in the recent years.

While some other financial institutes and banks are recently going slow in collecting deposits as they are facing reduced demand for loans, some banks are going on a drive to increase deposits indicating their penchant for growth. NIB increased its share in the total deposit for the banking sector to 5.5% and in total credit of the banking sector to 5.8% at the end of the fiscal year 2003/04 from 4.4% and 5.0% respectively in the previous year.

The trend is continued also in this fiscal year as its deposits grew by 10% and loans and investments by 23% in the first quarter of the current fiscal year as compared to the same period in the previous year. The bank has been able to maintain the ratio of non-performing assets (NPAs) at 2.47%, one of the lowest in the industry and well within international norms.

If you have not visited the Head Office at Durbar Marg during the last one month, you better go there now and see. The expansion of physical facilities is simply stunning!

The office now has expanded parking space. “Perhaps we are the only bank at Durbar Marg and Putali Sadak area of the capital with so much parking space,” boasted Prithivi Bahadur Pande, the Chairman and Chief Executive Director, presenting the 18 th annual report of the bank to the shareholders in the recently held AGM.

According to him, the customers there can hope to complete their work within 15 minutes of entering the premise.

Another trend that is catching up across the banks is to go for automation and use of electronic cards. NIB is the first bank to start 365 days banking. It has issued over 13,000 Visa Electron debit cards within a span of one year, the highest among all banks in Nepal. The bank also plans to deploy 1000 POS machines at different places by the end of the current fiscal year.

NIB has made significant contributions towards promotion of Nepali arts and architectures as evidenced by the gallery of artwork from Nepali artists donning the walls of NIB office buildings.

One additional trend likely to catch up is that of creating in-house training facility to improve employee productivity. NIB has set up, what it calls, a fully equipped training centre at its Putali Sadak branch.

But NIB is not paying much attention in increasing its exposure in consumer lending like other banks. “Our focus will be more on investment banking than on retail banking. With so many banks concentrating in consumer banking, the competition in this line is driving the margins to the rock bottom. So it is not going to be profitable in the long run,” says Pande.

There is no denying that so long as the banking system exists, bad debts will emerge. It is a normal phenomenon, and there is no way that it can ever be completely eliminated from the sector. Any layman going through the balance sheets of even internationally acclaimed banks will find that bad debt is an international phenomenon incidental to the business of banking.

If a manufacturing industry can have raw material process loss, loss in value of finished goods due to expiry or obsolescence, then question arises as to why a bank cannot have bad debts when money is the only raw material as well as finished goods of the sector.

What matters hence is not whether there are bad debts, but the post facto effect of bad debts, the extent to which bad debts occur and the safeguards taken for reducing the impact of bad debts in the profitability and liquidity of the organisation. Just as manufacturing units adopt various methods by which it can contain material losses, loan loss provisions in the banking system do the same job. There are some questions that need to be answered about certain articles of the Income Tax Act 2058, that apply to the banks and their handling of the bad debts.

Section 25(2) of the Act allows bad debts as expenditure if such bad debts are incurred within the norms of the Nepal Rastra Bank directives. Section 59(1ka) of the Act allows banks in Nepal to maintain loan loss provision to the extent of five percent of the total loans outstanding. This amount is allowed as expenditure while determining the taxable income provided such loan loss provision is derived following the directives of Nepal Rastra Bank.

Again proviso to section 59(1ka) of the Act restricts a bank from claiming bad debts by debiting the profits in case such bank maintains loan loss provision. Section 59(2) allows carry back of loss incurred in banking business to five previous years. However, any loss attributable to loan loss provision within the limits of Section 59(1ka) is not allowed for carry back under Section 59(2).

Pertinent questions arise from the above provisions. ‘What is the objective for building up loan loss provisions? Is it allowed to protect a bank against future loss through bad debts or just a general provision to the banking business for deferring tax? Why are prudential norms excluded for taxation purpose? Why does the government maintain double standard while enacting different laws and regulations?”

If it is meant to protect a bank from future losses through bad debts, what is the reason for restricting write off of bad debts from provision for loan loss? If it is just a general provision for deferring tax, will it not tantamount to injustice with respect to other businesses – a discrimination which should not be allowed by formulators of laws in any country.

Further, a very pious good wish of our government is to achieve GDP growth at par with other South Asian economies which means it has to be around 5% to 8%. We are very much aware that we have shortage of capital for industries that require huge capital and long gestation period. Mere accommodation financing and car purchase financing will not in any way help achieve the pious good wish of the government.

In case banks start looking for 150% collateral security for financing every new project because they have to make it absolutely sure that the loan is paid back, then we can be quite sure that within a few decades we will start playing with bows and arrows and development will become an infinite dream.

Formulators of our laws have again fooled the banks by introducing provisions such as section 59(2) that allow carry back of losses. Already established banks can make losses only by way of bad debts. When loss by way of bad debts is not allowed to be carried back, this section will be limited for the purpose of new banks only. As a result, it will become a redundant facility within a year or so.

In case bad debts are claimed as deduction in accordance with section 25(2) complying 59(1ka) without availing loan loss provision to the extent of 5 percent, in some years banks will have to part away with huge amount as tax and in some years nothing at all. Will this kind of inconsistent system catalyse the objective of sustainable growth and development? Further, if it so happens that all banks claim bad debts to the extent of 100 percent of their operating profit in the same financial year, what will happen to the revenue collection for the government.

Maybe section 59(2) is meant for strengthening the financial condition of the ailing banks (NBL & RBB) and it will be withdrawn as soon as they declare improvement in their situation. Withdrawal of tax benefits on life insurance policy (a limited amount deduction has been reintroduced lately) and introduction of deduction on retirement scheme of the Citizen’s Investment Trust (CIT) for assessment of income from salaries, have already established the notoriety of our policymakers as framers of such adhoc laws. These changes have a retrospective adverse impact on the honest taxpayers.

In fact, actual bad debts have never been allowed as deduction for income tax purpose in Nepal. It seems the formulators of Nepali laws are so confident that bad debts will not be incurred if these lawmakers were in the banking business. But that is not possible. Otherwise there would not be such a big problem with the two ailing public sector banks that were managed by these very formulators of law through their protégées in the past.

Certain quarters from the government also allege that bad debts emerge due to inefficiency of banks. But everyone knows the efficiency of the government. You only have to look at NBL, RBB and other bankrupt government organisations.

Disallowing bad debts means imposing tax on income not earned which is again similar to extortion (through legal means). Had an individual committed the same crime he would have been crucified in the name of law.

RBB and NBL have contributed a lot to the government exchequer in the earlier years and have also fallen in the elite category of Commercially Important Persons (CIP) despite being technically insolvent. The reason was that bad debts in those days could not be written off and tax had to be paid even on such bad debts.

While going through canons of taxation presented in the economics text books one may quickly feel that such canons are not followed in Nepal and it seems the Nepali government has a 50-year exemption on this because it is a least developed economy.

If we go through the world business news, we may find that in times of economic slackness, taxes are relaxed to increase the purchasing power whereby improving the business environment. However, in this country, taxes are increased when the economy slackens and 110% of revenue generated is utilised for government’s overheads. The government is not ashamed to notify that it could not mobilise any grants and loans for the purpose of financing development expenditure.

It seems our policy makers are always in a state of confusion and chaos while framing economic policies. This seems to be the only reason for framing contradictory micro and macro economic policies, or maybe the authorities have a feeling that it is their right to squander the scarce resources collected from the public.

If we are not sure whether bad debt is an allowable expenditure for banking business we can go few kilometres down south and check section 36(1)(vii)/(viia) of the income tax act of India. The section allows bad debts as expenditure to banking business to the extent not covered by loan loss provisions and allows writing off from the provisions for loan loss to the extent provided.

Whether bad debts are deductible expenditure is a question of law, which has to be addressed appropriately by the courts and the lawmakers of the country. Whether a bad debt claimed is a genuine bad debt is a question of fact which has to be addressed by the revenue department on a case to case basis.

(Sharma, FCA, is a Manager at NB Bank, Head office in the PDFA Office. The views in the article are his personal)