Establishing the culture of Gold Financing in Nepal through partnership with Muthood Finance; Exclusive interview with Sunanda Shrestha, CEO of United Finance

Sunanda Shrestha, CEO of United Finance, with over 25 years of experience in the Banking and Finance industry knows how to keep calm and evolve with the evolving market conditions. He started his career at 2050 BS from NIDC Capital Markets Ltd., staying there for around 10 years. Then he joined Nepal Srilanka Merchant Bank Ltd. followed by Lalitpur Finance Ltd..

He has been in United Finance Limited (UFL) for 6 years now. He has seen the ups and downs of the market and also played an integral part in bringing Muthoot Finance of India into the picture. In this backdrop, Rachit Agrawal, Aakriti Thakali and Krishna Khatiwada from Sharesansar visited Mr. Shrestha. The excerpts of the interview are:

Current position of United Finance Limited (UFL)

The financial statement of UFL for last FY year was rather gloomy with declining Net profit. What was the major reason for that?

The net profit of our company was very low last fiscal due to provisioning in share investment. We had been consistently making profit from our Share Investment portfolio, but since last year the stock market is in bearish trend despite of political stability after decades of conflicts and confusions. On one hand we couldn't book profit on share investment as in previous years and on top of that we had to make provision on investments, which made double impact in the profit. Besides it profit also squeezed due to NRB directives to keep interest spread at below 5% and CD ratio should not exceed 80%. 

Therefore, the decline is not because of decline in business, but due to the market trend and NRB compliance. So increase in volume of business and improvement in share market will definitely change our profitability.

UFL has, nonetheless, shown progress this first quarter compared to last year. The net worth, reserve & surplus, deposit collection, loans & advances are above industry average, but the net profit and EPS is still below average. How do plan to recover this situation?

There is a behavioral factor for this result. A large chunk of our loan portfolio is made of Term loan and Hire-purchase loan and these clients have a certain behavioral pattern. They are very aware and are punctual at making their Poush and Ashad end payments but in first quarter with Dashain festival around the corner, they get in festival mood. However this trend has changed now. A few years back our First quarter used to be always in loss and profit booking from Share investments used to help us. However this year the situation has improved and we are working for more improvements to habitualize customers to pay their installments on monthly basis.

We see a lot of youths leaving country every day in number of thousands, do you think we're going to have crisis of human capital in the days to come?

We are already facing crisis and not just because of brain drain in foreign land but because of increased demand of human capital in this sector. Banking and finance is a very professional sector because of which we can't bring just anybody and ask them to start providing service. They need some academic qualification, knowledge, experience and certain aptitude.

After the establishment of federal states, all banks and financial institutions have started expansion to all the local levels and the increased number of branches requires increased human resources to work in it. Because of this a lot of employment opportunities are being generated but very few people who can do the job. This is why we are having crisis of trained or experienced manpower.

Except for the capital size, there isn't much difference in the business framework of A, B and C class bank. What do you think sets them apart?

In terms of business, the difference is that we aren't allowed to open LC account and are not allowed to carry out foreign exchange transactions. Other than that the functions are pretty much same, but what really sets us apart is the type of customers that we serve. The banks, due to their status and stringent policies attract established or bigger size customers and the customers that come to us are very fresh trying to learn or make entry in banking sector. They are mostly small business-people, small savers and so on. When these people go to commercial banks, they find it difficult to meet documentation required and get confused by the strict procedural framework. So they look for simplified process and look for personal services and we provide them all kind of assistance they need. We make them aware and help them to document their accounting, registration, legal requirements etc. So, the customer segment sets us apart.

In a similar manner, among finance companies what sets United Finance apart from the rest?

When United Finance first came into existence, our focus was on Hire-purchase loan and that was our differentiator back then. After certain time, we moved into other sectors like business loans, housing loan and margin lending. Similarly, initially our deposits mostly comprised institutional deposits whereas now the proportion of individual deposits has also significantly increased. I can proudly say United Finance is one of the finance company running in a professional way with strong compliance to all prevalent rules & regulation, with clear policies and product papers. This has helped us to collaborate with Muthoot Finance, of India. They have joined hands with us as a Strategic Partner. Muthoot Finance is No. 1 NBFI with their expertise and strength in Gold Loan, having 4,500 branches and 150 tons of gold in custody. So we'll be little different from others and will bring in gold loan product in the market in different way.

Prospects of United Finance Limited (UFL)

UFL has been among the best-performing finance company consistently. Are you planning to upgrade to Development bank?

As of now, no we aren't planning to upgrade into a development bank. The main reason for this is, when we upgrade into a "B" class bank, it doesn't only mean capital increment. With added capital, the business must also increase proportionately and the return to service the increased capital should also rise.

Are you thinking of any new merger or acquisition?

No we're not thinking of any new merger or acquisition but if an attractive proposal comes our way we are open to it.

Where do you see United Finance five years down the line?

Five years down the line, I don't know about others but we will be moving ahead creating our own niche market with our strategic partner. However, if the current liquidity shortage extends for 5 more years then even existing will be a great achievement. But if everything goes well then I see nothing but prosperity. We now have stable government with multiparty system and federal governments for regional level developments and also relationship with both the neighboring countries has also improved. Only thing delaying for regional & local level government to make their move is the legal back up and working procedure, once these things are clear, the economy should make a vibrant move. In such situation financial institutions will have larger roles to play.

Investment of Muthoot Finance, India

The partnership of United Finance with Muthoot Finance, India is in final phase now. After that Muthoot will have a stake of 20.78% and paid-up of UFL will reach Rs 1.01 arba. The current market price of UFL is around Rs 167. So on what basis Muthoot is paying Rs 190?

The market price of any share fluctuates based on market conditions. It may rise today and fall the next day. When we started our negotiation with Muthoot, our market price was around Rs 300. After that they did our Due Diligence Audit (DDA), which gave a certain value to our share. Then, we've had multiple negotiations finally meeting at Rs 190. So, rather than market price, this value has been derived from United Finance's strengths and future prospects.

What kind of changes are you expecting after the investment?

Post investment, like I said will be focusing in Gold Loan and also get involved in remittance from India. However as I see the market here, initially we'll be involved in educating what is gold loan and how important it is for economic development. In a religious country like ours, pledging gold for loan in most of the cases are last resort as people having more gold and jewelry have high social status. In fact gold which are kept idle in household locker can be used as a good instrument to enhance commercial and economic activities. Every household has a piece of gold, small or large, coin or jewelry. Rather than keeping the gold idle at home, it can be used for expansion of business or investment to earn more. So gold can be used to generate additional capital for new venture or expansion.

Muthoot Finance has been able to create that impact in India and we expect to do the same in Nepal as we have many similarities. Currently Muthoot has 150 tons of gold in its custody and that goes on to show how much of an impact it has been able to create.

Current market conditions

What are the major challenges that UFL and the finance industry is facing?

The most serious challenge right now is the shortage of Human Capital, which has simultaneously also increased the problem of Operational Risk. A few years back, credit risk used to be our major concern but today the credit risk concern is taken over by operation risk as the credits are backed by collateral but the operational hazard is backed by nothing. So operational mishaps due to accident or employee negligence or incompetency has increased, which increases the risk associated with it.

Similarly from market perspective, the other greatest challenge is Liquidity Shortage. The liquidity shortage used to be a season problem lasting for 3 to 4 months, but this time it has sustained for 3 years which poses great challenge for the entire economy.

How have you managed the liquidity shortage so far?

I must say that we have been quite successful at managing liquidity so far. We have been able to manage to meet all financial obligations by proper planning of cash flow, maintaining close relation with all stakeholders. At the same time credit execution are being properly planned. So far we have been able to manage, however if the shortage persists for longer period, serious consequences may come in financial sector, affecting not only individual companies, it may affect over all financial sector, loosing credibility in domestic market as well as internationally.

Prior to entering banking industry, you were in Nepal Investors' Forum. How active are you in capital market these days? What do you think about the current status of our market?

I'm not that active in the market these days, but I do occasionally observe it. Capital market is an open platform, so the people involved must be diverse with diverse demography and diverse opinions, which create the market movement. However, if everybody listens to the same person and thinks the same way then the market won't be organic and I think that is the problem here.

Similarly, the supply of shares has drastically increased and the person who had 10 shares probably has 40 now. If 10 were from bonus then he must have purchased the 20 from right. So if he got it at Rs 100 then whatever price he gets above Rs 100 is profitable to him. So this increased the number of sellers whereas the number of buyers remained relatively constant. This oversupply of share might have led to the bear trend partially. Beside the liquidity crisis in financial sector has pushed the interest rate to higher end, giving alternative investment opportunity for high net worth investors.

The solution to the current stock market is to bring interest rate at reasonable rate and attract more investors in the market. Now with online trading facility, may attract much more investors, as it will give access to large number of people at one time.

What would you like to say to the young graduates out there?

To all the youngsters out there, first of all it's a matter of interest and if your interest is in banking sector then there are a lot of doors opening. The other thing I want to say is start investing a part of your income in stock market. Your investment at the time may be small and at the young age risk appetite will be high. A retiring adult can't take that risk with his/her saving but you can always earn it back and learn in the process. So start investing TODAY.