September 2005
Interview

"Banking industry will see a lot of M&As within 3-4 years"

Anil Shah , the youngest CEO of the oldest private sector bank Nabil, assesses the banking industry's current situation. Excerpts from an interview:

As the youngest CEO of the oldest private sector bank of the country, how do you evaluate the current situation of the banking industry in Nepal? What changes would you like to introduce if you were a central banker?

The country is going through one of the most trying times. The macro-economic scenario is not good because of the insurgency and instability. In this situation, it is difficult to make a fair prediction of the future. In the financial industry, we now require a change from quantity to quality. Right now we have many banks, finance companies and finance cooperatives. We have to move towards more quality now. In the next 3-4 years, I see a lot of mergers and acquisitions in this industry. So when the dust settles, we will see fewer but much stronger financial institutions. If I were a central banker, I would try to promote cooperative role between the commercial banks and the central bank. It has to be a partnership, not a parent-child relationship, because the central bank and we are in the same boat. The central bank is the regulator and we are the players in the market. We should not look at the central bank as an institution that is stopping our growth or intruding into our business. The central bank should not look at us as those who are always trying to break or bend the rules. As partners we can move ahead faster and in a much better way. The central bank's role is to view everything from the macro perspective. Its duty is to see how we can make the financial sector serve the country better. The decision of the central bank should not favour or disfavour any one institution. It has to look at it in totality. The decisions made should be good for the economy as well the banking industry as a whole. So, if I were a central banker, I would try to lead the financial industry from quantity to quality and also to build stronger partnership between the central bank and the players in the financial industry.

Is Nabil planning any merger or acquisition?

The banking sector is to be open as per Nepal's commitment to the trading partners in the WTO. By the year 2010, foreign banks will be allowed to open their branches here. They may initially establish their branches not for profit, but just for the sake of registering their presence here and prospecting the opportunities. We have to be strong enough to face the competition. We, in Nabil, being a major player in Nepal already, presume that there will be opportunities for us in major infrastructure development such as hydropower, highways, ropeways, railways etc. Once there is stability, there will be opportunities in tourism and other sectors as well. Mergers have been started and we already have one such example in our financial sector. This financial year should see a few more of these. We are always looking for growth and are trying to grow organically through business growth and inorganically through mergers and acquisitions. We have to find the right partner to merge with or a right target to acquire.

What about the possibility of Nabil being acquired?

There is a theoretical possibility but we do not see such players in Nepal yet who are big enough to acquire banks like Nabil, Himalayan or StanChart while the three of us could look upon acquiring others.

I see a couple of mergers taking place this year. Mergers are more amicable than acquisitions. A lot of mergers could take place but what is coming in the way is the 'ego' factor. Right now, most of the financial institutions are owned by a few large promoters whose egos or personal motivations force them to remain independent. They are not guided by economic realities. But at some point in time, economic realities will take over the ego factor and then more mergers and acquisitions will take place.

Corporates in Nepal are frequently complaining about the collateral-oriented lending from Nepali banks. What initiatives are the young bankers like you taking in this regard?

In the past, we, the young bankers weren't only after collateral. We would see the cash flow, the balance sheet, and the income statement etc. of the borrower institution and extend loans accordingly. The customers were excited about that. We wouldn't lend just because a house at a prime urban location was being offered as collateral for the loan. But now as the level of risk has increased due to insurgency and political instability, banks would desire to be more secure. By nature banks are very conservative. When the risk level increases, the bank's comfort level decreases and its appetite for higher security increases. The level of risk for the banking industry is at an all-time high now. That is why it seems like we have opted for collateral. The other aspect to it is that we have developed new products for collateral based loans. For example, we have a mortgage loan. It is meant to help you unlock your wealth so that you can make it more productive. So, being collateral-oriented does not necessarily mean being a conservative lender.

More importantly, by law we can't lend without collateral. Clean lending is not allowed in our country. But collateral is not the first thing we look for. It is just a secondary source of security. We first see the cash flow and the viability of the project. We study whether the customers can generate enough cash to pay back the loan and expenses and make a reasonable profit. Then we ask for collateral as a safety. We need to look after the depositors' interest too.

Why aren't banks interested in hydropower as yet?

Many people see potential in hydropower alone. But there are other areas as well with high potential. We need highways, railways, ropeways etc. Bankers need viable project proposals to invest. We cannot invest just because someone comes and says, 'There is a very big river, give me money to make a dam there and generate electricity'. There are several critical factors ignored while talking about the so-called good potential of hydropower. The first critical factor as I see it is the road that needs to be built to reach the site. Then the distance of the transmission line needed to be erected to connect the power to the national grid. These considerations render many of the hydropower projects unviable.

But we have other areas that may be equally viable. We are very interested in investing in such projects. But the entrepreneurs have to come up with project proposals. The banks cannot do everything including preparing the project report and then proving finance. I think, it is because of the instability that people are not interested to develop such projects.

Despite the strong legal provisions granting all the rights to the banks for enforcing collateral, the banks are very quickly resorting to blacklisting borrowers. The business community is complaining that the banking sector is now behaving as if it does not belong to the business sector. What is your comment?

It is very unfair to say this about the banking sector. All banks blacklist borrowers only as a last recourse. Our main concern is to get our money back and once we blacklist a defaulter, the chances of getting the money back are minimum. It is like throwing out the tenants. If you do it, you are not going to receive the rent that is due. Therefore, you will have to go through long court proceedings. It is only after a lot of discussions and persuasions fail that we blacklist a defaulter. In the past, there was nothing the banks could do. Blacklisting was introduced as a reform. If the project doesn't do well, it's the borrower's risk. When they make a handsome profit, we are not going to ask for a share out of it.

About the businessmen's complaint that the banks are making money and other businesses are not, let me make it clear that the banks are doing well as a result of the hard work and dedication of the entire team that works in the bank. We are the most transparent industry in Nepal. And it is not true that everybody is losing money. There are companies that are posting profit, for example, Dabur, Surya, Colgate etc. What is common among them is not only that they are multinationals; they all are transparent as well. Are we the only ones who are making money or are we the only ones who show what profits we make? Are we the only ones who pay taxes on the income that we generate? Yes, the banking industry is still healthy. We are like a doctor in a nursing home. Should the doctor be allowed to try to cure the ailments of patients or should the patients gang up and try to pass their diseases onto the doctor?

I always feel that there should be a rating system. A transparent rating system is necessary in Nepal. There are banks offering 2 percent interest and there are cooperatives that offer 12 percent interest. The depositors are confused. If there is rating, the depositors will get to know why there are different rates. Second, the rating helps investors. They know what to expect when they make investment in company's shares. NRB is the best institution to rate banks in Nepal. It regulates and knows all the banks well. It is independent of all the banks being rated. However, the rating that has come out recently does have some shortcomings. The rating done by any rating agency should not show any institution move more than one or two steps up or down in a single quarter. It can move down fast only when there is some financial disaster in the institution. Similarly, it can move up in so short period only when something terribly bad has happened in the industry affecting everybody else. And I think that the quarterly rating should not be made public. Only the annual ratings should be made public.

How do you comment on the recent monetary policy issued by the Nepal Rastra Bank?

Monetary policy should be made keeping in mind certain macro needs of the country. Today, we need stability in every sector including the financial sector. So we cannot expect the monetary policy to be one that shows great dynamism. The monetary policy has said that we need a huge growth if we have to pick up with what the National Planning Commission has projected. As we are not projecting that sort of growth, there was no point in coming up with an expansionist monetary policy.

The good step taken while coming up with this year's monetary policy was the interaction held with other stakeholders. This was not the practice in the past. Though some of the suggestions from the stakeholders were incorporated and some were not in the final document, at least their suggestions were asked for. Now for the policy's success, a lot of intangible factors have to fall into place, such as the level of stability and security in the nation. The policy has said that merger and acquisitions will be facilitated. That's exactly what is needed. The capital adequacy that the policy has asked for may be a bit too high. But on the whole, intangible factors like peace and stability are of a greater interest to the banking industry.

Nabil bank has posted good profits in the recently concluded financial year. What do you identify as the major contributing factors?

The profit we have posted shows the level of Nabil's transparency and the banking industry as a whole. That is the reason why banks are the largest contributors to the state coffers by way of corporate tax. The main reason behind Nabil's success is the people. Nabil's people are unique in the industry and they make all the difference. We evaluated the risk properly and spread that risk properly. Being the first joint venture bank in the country, we have always been one step ahead in understanding the customers, identifying the risks and ways to mitigate those risks. That is how we have been able to contribute to our shareholders in terms of profit generation.

Keeping in mind the macro environment, what plans and projections does the bank have for the year ahead?

We are going to focus on deposit mobilisation. You will see a new Nabil bank in terms of the products on saving and other deposits that are offered. We have always said that the paradigm for us in the competition is service and security. It's not only pricing that we are concerned with. Why should someone come to Nabil for our products? It is because of services and security we provide. Nabil has been here for 20 years. The services we provide are amongst the best in the country and that will definitely continue.

Nabil's mission statement is to be the bank of first choice. Could you elaborate on this?

It shows the philosophy or the culture of our bank. The achievement of our mission statement is not upto us. Our stakeholders have to choose us as their bank of first choice. Our customers should first think of Nabil for deposits or personal loans or real estate finance. Second, our shareholders should think of Nabil as a blue chip stock. If you look at Nabil's stock prices over the last 18 months, it has been phenomenal. That is where we have really proven that we're the bank of first choice. Third, our regulators, NRB or the Ministry of Finance, can take us as an example. We are the first joint venture bank in Nepal. We want to be a model bank. Next, we are not concerned only about making money. We want also to give back to the community. Our model for being a good corporate citizen rests on three pillars: health, education and sports. In health, we are partnering with Tilganga Eye Hospital to fight trachoma. In education, we are in touch with the Child Labour Association to provide education to underprivileged children. In sports, we have tied up with the Three Star Club to support football. And finally, we want to be the bank of first choice to our staff so that competent people will choose to work for Nabil.

What are the core values of the bank and how are these implemented?

Values are intangible. Most Nepalis they fold their hands and do some sort of prayer when they walk past a temple. That is the value we have and it doesn't mean those who do not pray are wrong. So, we need some values in the organisation too. We have a set of values. Everything we do is focused on customer service. That's why we say 'Hajur ko Bank Hajur ko Sewama'. Secondly, we are result oriented. We are innovative; we don't want to be a "me-too" bank. We want to offer new products and services. We are synergistic and want to work together. We are known to be very professional. Thus, we are CRISP - customer-focused, result-oriented, innovative, synergistic and professional. These are our values that we embrace always to reach our mission. These are implemented in our daily work, on how we interact among ourselves and with our customers.

The share value of the Nabil over the past 18 months has seen unprecedented increase from Rs. 750 to Rs. 1,650. What do you feel are the contributing factors?

We're not only seen as a first joint venture bank in Nepal but as a bank that is going to continue to be the number one bank in the future. Investors are coming into Nabil with a belief that it will continue to do well in the long term and will become a market leader. In such trying economic times, shareholders look for security and they have found that in Nabil. This huge leap in share price is the result of this. We are proud to have achieved this feat, despite fierce competition.

Nabil has also undergone a paradigm shift in brand image and market perception. Could you comment on this?

Over the past two years or so the brand image of the bank has definitely been overhauled. We changed our Nepal Arab Bank logo to the Nabil bank logo. Till then, very little was done to enhance brand perception. We were awarded the Bank of the Year by The Banker magazine. We used this achievement as a cornerstone for our image overhaul. Today Nabil is known as a modern/dynamic bank that is going out to the market with new products and services. I think, in terms of bank recollection and positive brand image, Nabil comes as a leading brand in Nepal. The challenge for us is to maintain this and move forward. The only asset of a bank is the brand image. We are dealing with people's money. Therefore they must trust the bank. The perception of our stakeholders is that Nabil today is one of the most secure financial institutions in Nepal. That is the brand perception that we want to carry forward.

There is a complaint that your tagline 'Hajur ko Bank Hajur ko Sewama' doesn't match with the bank's activities for enhancing its brand image. It is said that it sounds rather traditional and flattering.