Nepal Bankers’ Association has come under intense fire recently, which is just a tempest in a teapot; Interview with Gyanendra Pd. Dhungana
Mr Gyanendra Prasad Dhungana, CEO of Nepal Bangladesh bank and President of Nepal Bankers’ Association, started his career in Banking Industry 25 years ago after completing his study at India. He had completed his Chartered Accountant’s study when he joined Bank Of Kathmandu (BOKL). He worked there for around 7 years and then joined the workforce at Nepal Rastra Bank. He provided his valuable service through NRB for around 10 years and in the same period he completed his Master’s Degree in Financial Analysis from UNSW Australia. After his return, he joined the private sector again and has been here for around 7 years.
Carrying the responsibility of two big organizations, Mr. Dhungana believes that we always need to look at the entire system because in some way or other, everything is interconnected and when one falls the entire system is affected. On this backdrop and many fluctuations that has come into surface recently, Rachit Agrawal and Aakriti Thakali from Sharesansar caught up with Mr. Dhungana and had a brief discussion. The excerpts from the interview are:
What type of organization is Nepal Bankers' Association (NBA)?
NBA is an association registered under Institution Registration Act, 2034 of Nepal. The Association was established with an aim to maintain uniformity in Banking Standards, promote coordination among the members and eliminate the risk of unhealthy competition. In addition, this is also the platform where we, banker, can discuss about our problems, our products, our prudential norms and can organize our voice so that it reaches the concerned authorities like the Ministry of Finance, Nepal Rastra Bank and the like. However, the members of this association aren’t legally obligated to abide by the decisions of association. The members share a common moral and ethical values, which guides our decisions and agreements.
How does the NBA function, in regards to financing and administration?
It’s not a profit-making institution, so our finances come from the membership charge levied to each member commercial bank. I think it Rs. 3 lakh per year now. NBA has its own office space and functions like the way an institution normally does. We also organize trainings and seminars time and again, and if any amount is left after the program that too goes into our operational budget. However, generally much is not left so we primarily depend upon the membership fee.
It has already been 32 years since the establishment of NBA, can you tell us how the idea came and took form of this association?
I wasn’t in the committee when the NBA was first established, but I think when private banks started to come into Nepali market a lot of new ideas and standards came with them. Prior to the entry, there were only 3 government owned banks in the entire country. Nabil Bank came as the first private sector banking organization, then others kept adding on. With the new banks, there emerged the need of upgrading our banking sector to international prudential norms, modern banking practices etc. and for that purpose I think the CEOs back then came together and formed this association.
Why has NBA come under intense fire recently? After the signing of Gentlemen’s Agreement to not increase the interest rates of saving and fixed deposits beyond 8% and 11%, there were cases of non-adherence questioning the unity among banks themselves. What is your take on this manner as the President of NBA?
Actually it’s not like that, I think the media reacted more sensitively to the case this time because such activities have been happening for the last 32 years and they weren’t as hyped as this one. Nonetheless commenting on the matter at hand, every time there’s a problem in the system the association has to react. When things are normal, they are good and the role of association is crucial at times when things aren’t exactly working out. These crucial times can be characterized under abnormal economic indicators of the country, abnormal and risky banking practices and the like.
Regarding the interest rates, we haven’t fixed the rate rather we’ve just intended to eliminate the chances of occurrence of unhealthy competition. Unlike other industry, in Banking all companies are interconnected like a block chain. When one falls it affects the entire industry, thus creating Systematic risk in the market. So the NBA subtly watches the activities of our members and at any point in time if something feels off-balance we call a meeting and discuss the issue to derive a solution.
In accordance to the same, our purpose behind the Gentlemen’s agreement was to not let unhealthy competition emerge and to control the systematic risk that could arise because of a bank or few banks’ aggressive nature of operation.
Did the Gentlemen’s Agreement have all the bank’s sign?
Unlike what you said, the agreement isn’t signed. When we meet, we discuss all the matters at hand and the attendees sign the minute of the meeting.
So those who didn’t adhere to the agreement, were they not present that day?
They were present and I think the matter is resolved now and every bank is complying now. Most of the times what happens is, an organization is represented by an individual and if that individual leaves or for other reasons the company might not know of the things that were discussed. However, after we talked the matter was understood by all and all banks now are performing according to our agreement.
It was only for a few days, and it might be because of some confusions. Since it about interest rates, I’d also like to add that controlling the interest rates is under the jurisdiction of Nepal Rastra Bank, so what we did was just an step to facilitate the larger goal. What happens is, when we leave the interest rates to grow rampantly in pursuit of unnatural growth it leads to disaster. The first reason for this is the fact that the liquidity in our market is limited but the players are more which intensifies the competition, this brings systematic risk in the market. There will be no answer to “Upto what point should we go up?” and as long as everyone is competing, the rates will always go up. So when the interest on deposits are sky rocketing, at what rate to invest and lend? What should be our spread?
In such situation, first the avenues to invest or lend will be less, second even if lent the NPA (Non-Performing Assets/Loans) will significantly go up. Similarly, the manufacturing and other industries’ comparative advantage will be lost too. When the interest rates go up, the cost of production will also increase. So when the same product can be imported at a lesser price, why would anyone produce it? Then completing the cycle, increase in imports leaves a huge hole in our BOP (Balance Of Payments).
So we as bankers, need to see the country’s overall economic condition and the activities going on. Rather than a specific product or an industry, we need to look at the entire system and their interconnected-ness. If we see other economies around the world, the countries you find higher interest rates are the ones with economic instability, political unrest, civil war, lack of conducive environment for investment etc. for example Peru, Venezuela, Haiti, Syria and the like. These countries have more that 20-25% interest rates where the GDP growth rate is limited to only 1-2%. So the inference I’m making is, when the interest rates increase beyond the normal curve, GDP growth significantly slows down. So for development to happen, the Cost of Capital should be bearable.
Not only on the lending side, the interest on deposits should also be considered. If the interest on deposit is lesser than the inflation, the saver will no longer feel motivated to keep their money at bank.
So suitable interest rates for both deposits and lending is necessary for economic growth. Now with the completion of election and establishment of new government, the demand for investments has significantly gone up. However the amount of loanable funds we have is limited. In such condition if we unleash the interest rates then even in deposits the interest will go up as high as 20%, and increase in cost of deposits, increases the cost of lending thereby increasing the default rate. Not only this, the effect of interest rate goes nation-wide, even to people who don’t even have access to bank. For example, if we let the interest to just go up without control, it will bring inflation. So when an economy experience above average inflation, its externalities is transferred to the entire population. So in free market economy, we say that demand and supply brings the interest back to equilibrium, but sometimes waiting for the market mechanism isn’t feasible and the most sensible thing to do. We needed to act and so we did.
What do you like to tell to those general service seekers and media who have recently viewed NBA as something like carteling association?
These days we can see that more than media, social media has higher influence over people. And in social media many times people express their thoughts without thinking it through or the consequences it might bear. We at NBA, as an association of Bankers took the decision unanimously to curb the impending danger of uncontrolled interest rate increment. The higher interest rates on deposits may seem attractive at first, but eventually the cost is going to be transferred to the general people themselves in the form of higher lending rates or higher inflation rates.
We wanted to alleviate the chances of unhealthy competition, because the size of the pie is same and increasing rates will only intensify the fight between who gets the larger piece. In this period of liquidity shortage, we are aiming for a stable market and for that we’re not planning for inorganic growth, because when one bank increase the rate and achieves 60% growth rate where others are maintaining at 5% - the entire system suffers and that growth won’t be successful either.
Currently, you can get 8% on your deposits which was only 3.5-5% few years back. The inflation of our country now is around 5%, so we can see that the depositors are getting at least higher that the inflation rate, which in fact is a very good return. In many developed countries this value is below 1% or even negative for some.
Is NBB going to bring foreign loan, as NRB has opened up the way?
Yes, NRB has opened the way for bringing the foreign capital at LIBOR+3 interest rate. Some banks like NIC Asia and NMB Bank have already signed agreement. The things is, we can’t keep any collateral and the lender should be a Bank and Financial Institution or multilateral organization. In Nepal an unknown investor will be very reluctant to invest, they see us as high risk investment and LIBOR+3 isn’t that attractive to them. So the only option is to approach multilateral institutions like IFC, World Bank or the Correspondent Banks. We are also doing the same.
The bottom line is, the capital we bring from outside should be cheaper as the hedging cost is high. We’ll be bring the fund in Dollar value and repaying in the same too. So because of the fluctuation in foreign exchange rates, hedging is required. We’re currently discussing on how to hedge and who should be hedging. If NRB does the hedging, then it would be safer for both the borrower and lender. So we are trying, but we haven’t finalized on from where and when to bring.
Given all the facts, all the banks won’t be able to bring funds from outside. So our say on this matter is that NRB should’ve let the amount be equivalent to core capital rather than 25% of it. If it was so, then even if all Banks didn’t bring in the fund, the few banks who did would bring sufficient liquidity into the country.
Is there any possibility for interest rate to come down after the funds come in?
Yes but only to some extent. If the stipulated fund does come into our market, that too for long term (1-5 years) the interest rates will stabilize to some extent. Even now, the rates have stabilized to some extent because our banker friends understood why inorganic growth would be harmful for all. This is not the time to aim for high growth rates, we must stay in the periphery of our industry growth rate and the GDP growth rate in order to attain sustainable growth rate.
However, we don’t expect a drastic drop in the rates as our country is in transition phase. There is also huge demand for loanable funds in the market. Recently we heard the news that private banks only have closed the deals on financing 450 to 500 MW hydropower projects. So the demand for lending is there, it’s just suppressed for now and once we have enough liquidity in the system, funds will be mobilized. Because of this, the interest rates can’t be expected to fall down very soon. It might fall down till the rate of inflation but not below that.
Compared to others bank, NBB is very slow on expanding its business and loans, why so?
Like I said earlier, aiming for expansion now will be giving an invitation to unhealthy competition. On top of that, I also am the president of NBA. So rather than just NBB, I also need to look at the entire system and the economy’s condition. High growth now can be risky, so we have decided to keep it mellow. We’ll grow a moderate amount, maybe 5 to 10% or maximum 20% but not more than that.
As you can see, many banks have merged or acquired and the growth resulting from that is normal. However, the inorganic growth attained through aggressive measures is not suitable now and not sustainable either. Thus for now, we aren’t maintaining our stability and once the liquidity crisis is taken care of we’ll grow our business.
Although the banks are allowed to bring in 25% of their core capital, the possibility that such huge amount will enter our economy is meagre. In response to that, what other roles you expect from NRB and government to tackle these situations?
Yes, for that we’ve put 3/4 requests in the pipeline and some have been entertained too. They are:
Broadening the window of Refinancing (Like we have financed various productive sectors like agriculture, tourism and hydropower, so if NRB could refinance that amount to us then we would have enough liquidity to mobilize).
Removing the CCD (Credit to core capital and deposits) ratio. Normally what other countries have is CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio), but here we have both. So when we are obligated to fulfill two different requirements it ties our hands and limits our activities. The general perception is that, if the CCD ratio is removed the banks will go haywire and the risk will phenomenally increase. However in reality, CRR and SLR can give us enough cushion to manage our risk. In addition to these, the Basel III framework is in the process of implementation. So keeping all these factors under consideration, we’ve requested NRB to remove the CCD ratio requirement and for added safety the CRR and SLR rate can be increased. In addition Basel III framework will also play an important role. Once the CCD ratio is removed Rs 1 to 2 karba fund will come into market.
The government should incur the development expenditures timely from the first trimester itself. And if the rules or procedures restricts this timely expenditure, then they should at least find a way to inject this amount into the system.
On all these three matters, the NRB and Government of Nepal is positive. The refinancing limit has been shifted from Rs 5 arba to 25 arba, however we’re still requesting them to make it Rs 1 kharba. Secondly, discussions are going on to determine how to bring the Government’s money into market. Thirdly, the public enterprises and government institutions are doing their financial transaction through Nepal Rastra bank, and if that funds were to be moved through private banks an additional 20 to 25 arba capital will come into market.
So in all fronts, steps are being taken.
What will be profit of banks in Q3? Will it be the continuity of second quarter or investors can expects growth on banks profit in Q3?
In third quarter, the overall cost has increased for the banks. The cost of deposits has gone up and in addition a lot of new branches are being established, which has doubled the operating expenditures. However, the return won’t come right away and it’ll take time. So because that there might be slight growth in case of few banks, as far as NBB is considered, the growth is in negative as compared to last years’.
So in average, I think you’ll see growth but it’ll be very nominal. The Q3 reports are coming soon, and maybe you’ll see some banks with extraordinary growth but that growth is unnatural and unsustainable. When we go for excessive growth without strong internal fundamentals, accidents might happen. And regarding this, I think the regulator is also watching.
The nature of banking is such that, its growth must be in line with the economy’s growth. Unnecessary growth in short period of time increase the chances of errors and makes the company vulnerable. So for long-term sustainability stabilized growth is necessary. In our market, the deposits are mostly short-term, whereas the lendings are long-term. So there is a mismatch between the duration, which has made us more cautious in creating further credit.
There is a mandatory instruction from NRB to open branches on all local bodies or Gaaupalikas as per new federal structure. What is your target regarding this and will this be completed by the time NRB has specified?
Regarding the opening of new branches at all the local bodies of the country initially NRB had given us the liberty to choose. So we chose and 119 Gaaupalikas still remained and even among them few banks chose where they’d go. Even after the second round of selection 90 Gaaupalikas remained which were very remote and no one wanted to move there. So finally NRB with an aim to allocate in average 17 places for each bank decided which banks needed to go to those places.
The NRB has given the deadline until Ashad 2075, however there are still a lot of factors that may come into play. We are going to open our branches at 22 Gaaupalikas as opposed to the minimum of 17.
Similarly, in order to manage and utilize the funds and resources more optimally, we have discussed with each other and exchanged the designated places.
Won’t this create huge burden for banks in terms of costs? What your view regarding this in terms of cost benefit analysis?
If we were to solely base this expansion on cost-benefit analysis, then no banks would go to these places. So rather this cost-benefit, this is our Corporate Social responsibility and the prudential norms that we need to abide by.
These branches to be opened in remote places, won’t even reach breakeven till the 3rd year of operation and we’ll need a minimum of Rs. 50 lakh to set up one branch including all the machineries, staff, building, internet connectivity, fax, computers etc.. Even bigger problem to us is the manpower. We won’t be able to find staffs, and even if we did, we’ll be receiving transfer requests with 3 to 4 months. So, for longer term staff, we’ll need the local people and for the local people to develop will take at least 2 years. Sending people from Kathmandu will neither be efficient nor effective.
However looking at the positive side, the banking transaction will be initiated in remote parts of the country too, this will in turn increase the deposit collection. Similarly, once more people are integrated into the system, certain amount of informal economy will also get formalized. Currently, the reach of banking sector stands at approximately 40%, but after the full expansion this percent will substantially increase. I think within the first year we’ll reach 60 to 70%.
The most important thing is, diversification of banking services doesn’t only limit to banking sector. With it, it bring prospects for all sector. The locals can gain easy access to financing without having to travel 2/3 days to the city. The local bodies will also have enough room to grow and develop on their own. The money kept in vaults or under the bed sheet will come into banking channel. Thus all these micro-elements will push the country’s growth.
So for now, yes it is hard, but looking at the long-term fruits it’ll bear I think it’s worth it.
Instead of penalizing the BFI’s not complying with NRB capital increment plan, NRB has given some relaxation to these BFI’s. Won’t this a double standard shown by NRB? What’s your take on these issues?
Yes it might seem like the ones who aren’t fulfilling are the ones benefitting and that is the irony of the system. Punishment and penalties aren’t the solution to everything. Even among those who haven’t met the capital, we need to consider why. If they are able but not doing it, then that surely invites penalty, but those whose hands are tied should be given some slack. For example, the court’s stay order like in case of NCC Bank.
Even if you see in Banking Sector, the defaulters are always the ones who are benefitting. Regular payers pay a certain rate, and those who say that they can’t or that they went bankrupt only pays principal leaving the interest fee. This is the irony. I’m not saying it’s wrong either, because when someone goes bankrupt what choice do we have?
So till now majority of banks have reached the Rs. 8 arba paid-up capital and this is one of the greatest achievement of NRB. We had taken more than a decade to reach Rs 2 arba and now within 2 years we’ve reached Rs 8 arba. So this is a huge achievement.
Currently there are 28 commercial banks in our country. Given the size of our economy, do you think this number is still huge?
That is another big question. When there were 35 banks, we said it was more than enough and now too the same question arises. So I think we need to consider other factors too before concluding if 28 commercial banks is too many for us. However considering the size of our economy, 28 might be a little more than needed. Maybe 10 large banks would be more than enough.
When the number of banks increases, the level of employment increases which is a good thing for a country like ours. Whereas on the other hand, when too many banks fight for a little sum of capital the chances of unfair and unhealthy competition arises. In many developed countries, there is an anti-merger law according to which big-4 banks of the country cannot merge.
In addition to that, we also need to consider our country’s capacity to supervise and regulate the industry, total available resources and what measures to be taken when unfair competition arises. So still I think that 28 is more than we need. For example in India, even for such huge population only 4 to 5 insurance companies exists, whereas in Nepal there are already 20. So are they really necessary? If not then in coming days they might merge or get acquired and gradually in free economy, the number will come to balance. And I believe similar will be the case in Banking Sector.
The effects are starting to be seen now. Many banks are voluntarily going for merger, because it has become difficult to operate as a stand-alone bank. For small banks, the base rate itself is very high and then at what rate do they end to the borrowers? Bank like ours’ have a base rate of 11% and keeping a minimum spread we’ll have to lend at 13%, whereas bank like standard chartered have a base rate of around 5%. So their spread will be high, and what we generate by lending 1 crore will be generated by them through 50 lakhs only. So in course if time this number will come down to equilibrium.
