March 2005
CORPORATE FOCUS

Himalayan Bank Bigger Bank's Bigger Strategies

How is the biggest private sector bank of the country doing in view of the current situation in the country?

The bigger the bank, the bigger the problems. The big problem facing the biggest banks in the country, particularly the private sector ones, is the management of liquidity. While the smaller commercial banks are managing this problem by using the excess liquidity in consumer loans, the big ones are taking a different approach. Himalayan Bank Ltd., with Rs. 25 billion as deposits and Rs. 13 billion as lending and almost an equal amount as investment, shows an example.

‘Rushing to invest the excess liquidity is not a good idea in the present circumstances,’ says Ashoke Rana, the Senior General Manager and CEO of the bank. ‘So, we’re not aggressively encouraging consumer lending. Though we’re doing a little bit of consumer lending as well, we’re very much choosy in selecting the property as well as the borrower to finance.’

However, the bank is also about to introduce a new scheme under consumer lending and will be called “Himalayan Bank Subidha Loan.” But it will be quite different from all the other consumer lending schemes available in the market in that it will be a flexible scheme and the borrower can choose from a wide menu as per need, informs Rana.

This, he expects, will have some impact in the market. When Himalayan Bank introduced its housing loan scheme in the market, all the banks had to reduce their interest rate in such a scheme. ‘A similar impact is also expected when our new scheme is introduced,’ he adds.

Himalayan Bank is also a prominent player in the business of handling inward remittances from Nepalis working abroad. Two years ago, the bank started sending its people to places where the number of Nepali workers was highly concentrated. That was followed by other banks as well after some time.

Then, what is the impact of the competition in this business of handling remittance?

‘Our HimalRemit is doing extremely well. In fact the success in this business is dependent not only on sending bank people abroad and convincing the workers there to send money through the bank. The real hard work is here. We have to provide the best service so that people get the money in time. We were ahead in this business, and we are still ahead because of the better services we are providing.’

Another big challenge facing the banking industry is the high non-performing assets (NPA). But Himalayan Bank has contained this problem, says Rana. ‘For example, our latest report shows that the share of NPA has come down from 30% to 10% in a few years. Most importantly, almost all of the loans from 2001 onwards are performing,’ he adds.

According to another information shared by Rana, hardly Himalayan Bank branch outside Kathmandu has an NPA history. Most of these problems are from the head office and the New Road Branch. Having localised the problem, the bank is now firmly tackling them.

The main focus of the Himalayan Bank now is in providing better services to the existing clients. ‘We have only 3,000 loan customers. We think that that is not enough. We, however, have 60,000 accounts. Now we’re trying to find out about the service needs of these account holders. After that we’ll come up with ways to serve them better and earn revenue’, says Rana.

In this connection, the bank recently conducted a survey of the clients and it revealed some interesting facts. ‘For example, they were satisfied with our services and did not advise us to go for 24 hour banking. They were quite happy if the bank was opened till 8 PM,’ he says. Another finding was that, for most of the customers, the guard was the first contact point in the bank. So the bank has now provided special training to the guards about customer handling. ‘Surprisingly, the customers were not complaining about so many things lacking in the physical facilities in the Himalayan Bank premises. Therefore there is no slowdown in the number of new accounts being opened,’ he informs.

However, the bank is not complacent. ‘We’ve already revamped all credit policy guidelines. The top-down approach of the previous days is no longer there. The credit decisions are all delegated to the credit officers.’

To prepare itself for competition in the WTO era, the bank is now investing in technology. Apart from the tie-up with SmartChoice Technology to provide ATM services to the customers, the bank is upgrading the software. ‘Within six months all our operations will be centralised through the technology and it will help in further refining the decision making process and other aspects of management,’ he hopes.

With this, the bank is increasing its attention to card business. Now the bank has started providing international credit cards to people who carry passport. With this Rana hopes for a 35% growth in non-interest income this year. ‘This will reduce our dependence on interest income and it will enhance our competitive strength further,’ he adds.

The Himalayan Bank is also expanding its involvement in the promotion of sports. This year, it started sponsoring football and expanded its sponsorship of golf into the professional category as well. ‘It is to give something back to the people who supported us in the business. It also gives us mileage,’ says Rana.

Amadeus
Evading Taxes in Nepal

While the authorities may be devising strategies to nab the Nepali corporates to extort revenue, by legitimate means or otherwise, some foreign companies that are generating huge business from here are not paying any tax to the Nepali government.

A page from the website of Daily Star, a Bangladesi newspaper, about the court order suspending Amadeus operation.

One such example is that of Amadeus, which is operating in Nepal since 1997 and the tax officials have confirmed that the firm has not paid a single penny as tax to the Nepali government.

The company earns sales revenue of nearly Rs. 44 million per year from Nepal as per the estimation made on the basis of its business in the year 2004 (see box for the basis of estimation). This volume of business attracts nearly Rs. 6.7 million as taxes to the Nepali government. By this estimation, the total tax dues for the eight years of its business in Nepal comes out to be Rs. 54 million. Since Nepal's tourism business in the earlier years was much higher than in 2004 and the above estimation is based on the assumption that the bookings are made only on Kathmandu-Delhi sector of airline tickets, the actual tax amount due may be still higher.

Promoted by world renowned airlines such as Lufthansa, Air France and Iberia, Amadeus is a company having worldwide operations with headquarters in Madrid of Spain providing Global Distribution System (GDS) services to the travel trade industry. In Nepal it was operating till December 2004 through a liaison office of Amadeus India (P) Ltd. and now a separate company called Amadeus Nepal (P) Ltd. is registered. Under this service known as Computerised Reservation System (CRS), the travel agents are provided computer terminals and software for online booking of different travel services such as airline tickets, train tickets, ferry, cruise, car rentals etc. When a travel agent books a ticket in one of the member travel trade service provider of a particular GDS company, the GDS company gets a commission from the airline, hotel or travel trade service provider company concerned at a rate ranging between US Dollar 1.5 and 2.0 per "segment" or even higher. A one-way airline ticket for Kathmandu-Delhi sector is considered one 'segment'.

Apart from Amadeus, there are two other GDS companies operating in Nepal at present. Of the two, Abacus is represented by national flag carrier Royal Nepal Airlines Corporation (RNAC) since 1998, while Galileo is represented by Galileo Nepal, a company that was registered in December 2004 and started operation in January 2005.

According to Amrit Shrestha, Manager, Customer Support, for Abacus Nepal, all the revenue generated as commission by bookings through Abacus system in Nepal is collected by Abacus Nepal and shared between RNAC and Abacus. Jugesh Shrestha, General Manager of Galileo Nepal says, as per the arrangement made by his company, all the revenue generated as commission by bookings from Nepal through Galileo system will be remitted back to Nepal in foreign currency and all applicable taxes will be paid as per the law. He also mentioned that currently all tax withholdings as required by the law were made and being deposited on a timely manner and VAT returns filed on a monthly basis.

But Amadeus staff were not ready to reveal the details of the arrangement in their company, either for remitting revenue, paying corporate income tax or tax deduction on other payments such as salary to the staff and house rent. The only reply from them was that they are not generating any revenue from Nepal and therefore there was no need to pay any taxes here. This statement, however, contradicts the provisions of the Income Tax Act, 2058 which requires that the income of a resident person from the employment, business or investment of the year irrespective of the location of the source of income is assessable income for tax purposes in Nepal and the applicable taxes need to be paid. Amadeus is earning revenue from business transactions undertaken from Nepal under the GDS system. Under the GDS system the revenue is collected at the Headquarters of GDS company and revenue generated by each location is remitted to the country marketing company at a specified ratio. Since such revenues are not remitted into Nepal by Amadeus there is a possibility that these are booked in Amadeus India, which looks after the Nepal market.

Virangana Singh, Manager-Nepal of Amadeus Nepal (P) Ltd., said in a written statement made available to New Business Age, that her company is providing services to the travel agents here, all free of cost. But she did not clarify how a business firm like Amadeus provides services free of cost without generating revenue from any source. It is found that 250 travel agencies in Nepal have signed contract with Amadeus. Under one such contract dated April 1, 1998, the travel agent is required to make a minimum number of bookings (segments) per month failing which it is required to pay a charge to Amadeus at the rate of US$ 2.40 per "missing segment." However, in practice Amadeus has not collected any such charge from the travel agent. Recently it has even started providing some incentive to the travel agent for each 'segment' generated. Thus it indeed seems that the company is providing services free of cost to the travel agents. But in reality it earns revenue on the strength of the bookings that the Nepali travel agents make using Amadeus system. The costs incurred in this way and by providing trainings and maintenance services are not only covered by the revenue earned by Amadeus as commission from the airline or other tourism service provider concerned for each booking made by travel agents using Amadeus system, there clearly is huge surplus. Thus the claim of providing free services does not hold ground. The revenue earned by Amadeus is totally dependent on the work of the Nepali travel agents because if they stop making the bookings or if they make all the bookings through other GDS, Amadeus will not earn any revenue. Therefore, Amadeus revenue is generated in Nepal.

In 2002, Amadeus India was in a tax dispute also in India. But the Delhi Bench of Income Tax Tribunal decided in the company's favour to grant it tax concession because the court was convinced that it was exporting data through electronic medium and it was like exporting computer software. In India computer software exporters are granted various tax concessions. But in Nepal, any income earned is taxable irrespective of its source - whether foreign or domestic.

Though operating since 1997 in Nepal, Amadeus was registered with the company registrar's office only in December 2004 as Amadeus Nepal. As the registration of the company was done only in December it is presumed that operations since 1997 was done without obtaining any registration with the Inland Revenue Department. Singh refused to provide any information in this regard.The registration details show Amadeus Nepal as a software company, with Radha Bhatia as its owner. She is learnt to be the mother of Ankur Bhatia, a technology expert who heads Amadeus India (P) Ltd. According to the officials of the bank where Amadeus Nepal keeps its account, the firm is receiving about Indian Currency Rs. 1.0 million every about three months which is presumably meant to meet the office operation costs. Thus the company is also depriving Nepal the convertible foreign exchange that is generated through the company's Nepal business.

Amadeus India was operating on almost similar basis also in Bangladesh till some years ago and was forced to close down its operation there on the grounds of tax evasion and foreign exchange embezzlement. In December 2003, a court in Bangladesh had issued an injunction ordering suspension on all the travel booking activities of Amadeus. After this development, Amadeus has made somce changes in its Bangladesh operations, it is learnt. However, the details about it could not be collected.

This story indicates that Amadeus is taking advantage of the ignorance of Nepali tax officials about businesses transacted through the electronic system. Though the Electronic Transaction Ordinance was promulgated some time back and the regulations to implement this law were introduced only recently, it is to be seen whether the present tax administration of Nepal is technically competent to handle this case.